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© NO 1 




What Every Investor"' 
Ought to Know 



ROBERT L. SMITLEY 



The Magazine of Wa ll Street 

42 BROADWAY 
NEW YORK 






Copyright, 1918, 
TICKER PUBLISHING CO., INC. 



SEP 21 iyi« 



©CLA506038 



CONTENTS 

CHAPTER PAGE 

I. Knowledge vs. Chance — The Investors' 

Necessity .......... 7 

II. Protecting Dependents— The Will— Trust 

Funds 18 

III. What is a Bond? — How Underwritten and 

Marketed? 35 

IV. Gauging Personality — The Importance of 

the Officers 48 

V. The Bond Circular— How to Read It— Good 

and Bad Ones ........ 61 

VI. Kinds of Stocks and Bonds — Definitions . 72 

VII. Investing a Half Million Dollars .... 83 

VIII. The Stock Circular — Avoiding its Hypnotism 101 

IX. New Promotions — The Unreliable Broker . 114 

X. Keeping Proper Records of Your Wealth . 127 

XI. Newspaper Tips and Public Gossip — ^Their 

Pitfalls 139 

XII. The Financial Books to Read — Arranged in 

Courses 150 

3 



PREFACE 

THE chapters constituting this book were 
published in various issues of The Maga- 
zine of Wall Street by the author under 
his pen names of Arthur N. Slocum and James 
Kennedy. 

Almost all books written for the investor are 
both technical in language and dry reading. 
These articles are set forth in the simplest form 
and fictitious names and situations are used to 
attempt to make the chapters more interesting to 
the reader. The author hopes that the casual 
investor will apply such instances to his own 
case and thus make the book profitable through- 
out. 

It is a strict rule of The Magazine of Wall 
Street — wherein these chapters appeared — to 
only publish articles which are easily understood 
by every reader and whose context has an actual 
concrete value to the reader. This summary of 

5 



6 PREFACE 

purpose has been attempted in each chapter. It 
may be that the reader will not at first appreciate 
the continuity of financial education set forth in 
each chapter, but these chapters are an incentive 
for further study and each one contains a text 
which may be enlarged upon at the will of the 
student. 

The elementary features of What Every In- 
vestor Ought to Know may be found in this book. 
Do not try to read it through at one time. Read 
a chapter at a time and then take up the supple- 
mentary reading applying to this particular chap- 
ter. The reader will find that it will be very 
profitable. 

Robert L. Smitley. 



WHAT EVERY INVESTOR 
OUGHT TO KNOW 

CHAPTER I 

Financial Knowledge Versus Chance 

Investor and Speculator — What the Classes 
Mean — What to Avoid 

KNOWLEDGE spells Success. This aphor- 
ism is becoming commonplace, but its 
truth cannot be controverted. Especially 
is this true when it refers to dealings in the 
security markets. The differentiation between 
the terms speculator, underwriter, investor, re- 
organizer, and promotor is usually pronounced 
in the minds of all those who are acquainted with 
the terms, but when the actual definition is called 
for, the dividing line is blurred and indistinct. 
There is but one psychological dividing line. 
The above phases of the security business stand 
on one side and the simon pure chance-taker 
stands on the other side. 



8 WHAT EVERY INVESTOR 

The Chance-Taker 

This class of operator discards the funda- 
mental basis of the speculator or investor, which 
is knowledge. His tools are Luck and Tips. 
The books of a fair sized, or large brokerage 
firm could easily be divided into the two classes, 
if one took the time to investigate each customer. 
The writer, at one time a partner of a brokerage 
firm, was interested to a sufficient extent to make 
such a test. There were about three hundred 
active accounts of individuals in the ledger when 
the list was taken. Twenty-five per cent of these 
were, without doubt, gamblers and the rest specu- 
lators and casual investors. At the end of three 
years, ninety per cent of the gamblers had dis- 
appeared. Their names were no more to be 
found in the ledger. Not more than ten per cent 
of the other class was lost to the business. It 
was a clear case of Science versus Luck, with 
Science the winner in nearly every instance. 

Psychology of the Gambler 

The chance-taker has no plan of campaign. 
He is a creature of the moment much as a butter- 
fly in the animal world. The world is scien- 
tifically ruled and there are inviolate mathe- 



OUGHT TO KNOW 9 

matical rules to fit the gambler in any game. 
The chances are always against him and when 
this element of mathematics is supplemented by 
superstition, the chances for his failure are en- 
hanced. The word Superstition is used in much 
the same manner as the word Luck is used. 
Both eliminate all consideration of the knowledge 
element. 

This superstition feature is the most ridiculous 
of all the elements which tend to formulate the 
gambling character. It would be as impossible 
to list all the superstitions as it would be to reach 
the nth power. One man trades in U. S. Steel 
com. because in the past it has been his luckiest 
stock ; a second always sells stocks when Trinity 
Church chimes are playing a hymn; a third be- 
lieves that prices fall on Tuesdays more than any 
other day of the week ; a fourth always sits in a 
certain chair. The list could be continued until 
it would become tiresome, if it were not tragic. 
Human beings are all imbued with a certain 
degree of superstition, but the man who can 
trade his superstitious leanings in business for 
a modicum of real knowledge is just that much 
ahead of his former kind. 

"Tips" are the second worst tools of the 
chance-taker. They are even more dangerous 



10 WHAT EVERY INVESTOR 

for the user than his superstitious qualities. The 
rational man would consider the reason for a 
"tip." In the realm of finance there is no senti- 
ment. Each man is primarily for himself. It 
is the law of nature and the "tipster'' is the man 
who offers advice without a basic reason for 
giving it. He may have a private and a very 
personal reason, and it is true that "tips" often 
are productive of gains, but only when the recipi- 
ent acts at once and takes his profit, if any, when 
it appears, without the slightest delay. Daniel 
Drew, the most famous of the "bears" of former 
days, dropped a small piece of paper on the side- 
walk as he left his carriage to enter his office. A 
by-stander picked it up and read, "Buy 5,000 
Erie at the market." Without doubt, this order 
was meant for Drew's broker and the loss was 
an accident. Within fifteen minutes every 
gambler had the word to Buy Erie. Of course 
Drew created an excellent market for his sales 
that particular morning. 

Advice versus Tips 

It is the one purpose of legitimate brokerage 
firms, investment houses, news agencies and mar- 
ket advisers to retain their followers. To do 



OUGHT TO KNOW 11 

t|iis they must advise in such a manner that they 
are right more often than they are wrong. The 
gambler refuses to accept the experience and 
knowledge of good advisers, whose sole business 
is to study the security markets from every view- 
point. He prefers the excitement of following 
his superstitions and tips. The result is inevit- 
able failure. 

Good advice and purchased assistance for the 
purpose of dealing in securities is even more 
necessary than in the commercial world. The 
Business of Trading in Stocks is more difficult 
than any other form of business, and it is unfor- 
tunate that so many will not appreciate this fact 
until they first burn their fingers in the fire. 
From the psychological point of view, the re- 
quirements, in addition to sufficient capital, are 
Knowledge, Study, Good Advice, smooth running 
machinery and above all a firm, brave tempera- 
ment, so different from that of the gambler. 

The Speculator 

The limitations of this article are too confined 
to list the resources of the successful speculator. 
Primarily, however, he must have an intimate 



12 WHAT EVERY INVESTOR 

knowledge of what the Trend of the security 
market is as shown both by the prices — the 
"tape," to use a technical word — and exterior 
commercial and financial influences. These in 
turn may be influenced by political and socio- 
logical conditions. There are plenty of excellent 
books on this subject and there is at least one 
service in existence which will assist the specu- 
lator. Our study is the man who has taken 
advantage of such opportunities. 

Cornelius Vanderbilt, Leonard W. Jerome, An- 
thony W. Morse, Jay Gould, and on down to 
men of today, such as Bernard Baruch, are types 
of successful speculators who have bettered the 
world through their success. The "constructive" 
speculator is the very best asset which any coun- 
try can have. His acquired knowledge teaches 
him that the efforts which tend toward the im- 
provement of mankind are the only dependable 
speculative efforts. The knowledge acquired by 
Mr. Baruch through speculation in industrial 
securities made him one of the most valuable 
men for this country on the Board of National 
Defense. The speculative knowledge acquired 
by the late E. H. Harriman in railroad securities 
caused the Union and Southern Pacific systems 



OUGHT TO KNOW 13 

to open up a country which will possibly supply 
the nations of the earth with food. If Mr. 
Harriman had been but a chance taker, he would 
not have achieved what he did. If he had been 
but a careful investor and had not studied and 
planned, the result would have been somewhat 
the same as the gambler's so far as his fame is 
concerned. 

Required Temperament 

To plan out a campaign just as the General of 
an Army does, is the necessity of the Speculator. 
It is said that Germany had every move of war 
mapped out in advance when the rush was made 
through Belgium. An unexpected check was 
given to these plans at the very start, and they 
had to be at once revised to meet the new con- 
ditions. It was absolutely necessary to have 
the original plans, even though they were later 
altered. The analogy applies to the speculator. 
He maps out his course after study, advice, retro- 
spect, and outlook. Once determined that he is 
right, he irioves forward with his campaign. 
There must be no cowardice, but sometimes 
there must be quick decisions and retreats. The 



14 WHAT EVERY INVESTOR 

old campaign type of speculator does not con- 
sider one reverse or one false move the end of 
his efforts. He fights on until either victory or 
defeat is effected. If his knowledge is better 
than his opponent, victory is assured, but he 
always provides a safe line of retreat and makes 
certain that his commissary department — his 
capital or margin — cannot be entirely destroyed. 

The successful speculator may spend all his 
time with his broker, may be a broker, or he may 
devote the surplus from gains derived from an- 
other business and speculation may be only an 
avocation. In any event, he will follow his own 
judgment supplemented by the best advice he can 
buy; his temper will not sway his purpose; his 
nerves must be trained to stand sudden shocks ; 
and he will not be influenced by superstition or 
worthless "tips." 

The Investor 

In following out the psychological trend the 
Investor is classed a grade or two higher than 
the Speculator. Why this is so it is hard to de- 
termine, but the man who Does Business in 
Stocks and Bonds is much better satisfied to be 



OUGHT TO KNOW 15 

termed an Investor than a Speculator. If the 
economic status is carefully examined, it will be 
found that the Speculator, as he is defined in 
our minds, does much more for mankind than 
the Investor, although each has his place. 

The Speculator's efforts in the broader sense 
affect the whole community. His work helps to 
build up new industries, creates new positions 
for workmen, starts new cities and stimulates all 
commercial endeavor. Without the speculator in 
United States Steel stocks, we would not have 
the remarkable resources which we have to assist 
us in this World War. We would not have the 
City of Gary, Ind. Had Mark Twain not lost all 
his money trying to support a type-setting 
machine, we might not have had the Linotype and 
its kindred forms of machinery. 

Nearly every man and woman has become 
Investor. But the Investor requires nearly as 
much knowledge to succeed in his purpose as the 
Speculator. He does not realize this fact so 
thoroughly as the Speculator, but he is fast com- 
ing to realize it. The old type of Investor was 
the head of a family living in Rhode Island who, 
after making $100,000, "invested" it all in New 
York, New Haven and Hartford Railroad stock, 



16 WHAT EVERY INVESTOR 

so that his family would never want. He felt so 
certain of his investment that he willed it to his 
heirs in such a manner that it could not be sold. 
He considered a broker's office as equivalent to 
a gambling hell and he smugly died with the 
knowledge that he had done his part in the 
world. His widow is probably running a board- 
ing house and his children clerking or steno- 
graphing in a broker's office. He was one of the 
type so aptly termed, in The Magazine of Wall 
Street, a "Sleeping Investor." 

Honore Balzac, in his Comedie Humaine series, 
considers the genus "Old Maid" as an economic 
loss to the world. If he had lived today, he 
would probably have classified "The Sleeping 
Investor" the same way. The successful Inves- 
tor must be as active and up-to-date as the Specu- 
lator if he is to retain his Income and Capital. 
He will have his Investments examined by ex- 
perts periodically just as he will go to his dentist 
every few months, or be physically examined 
by his family physician. He knows that it is 
his duty to take out Life, Health and Fire In- 
surance, but he also knows that he cannot keep 
up the premiums on his Life, Health and Home 
unless he insures his Income and Capital. 



OUGHT TO KNOW 17 

The Investor is organizing. We already have 
two or more organizations comprising railroad 
share holders and it will not be long until the 
industrial share holders will come together under 
some capable leader to ask for uniform reports 
or some other excellent feature of co-operation. 
The Investor is gradually awakening and the 
meaning of his name is becoming confused with 
the definition of the Speculator. 

The Investor has found out that it is necessary 
for him to keep in touch with events and happen- 
ings if he wishes to protect and increase his 
funds. The habitual bond buyers have also 
reached the same conclusion. The man who 
once purchased Rock Island Co. collateral 4% 
bonds due 2002 at 60 or 70 and put them in his 
safe deposit box, forgetting he had them, learned 
some short time ago for the first time that the 
total equity to which he was entitled after the 
downfall amounted to a problematical $100 or so 
for each bond costing between $600 and $700. 
When he gets his next surplus, and invests, the 
investments will be analyzed. 



18 WHAT EVERY INVESTOR 



CHAPTER II 

Protecting Your Dependents 

Your Will — Executor — Trust Funds — Ante- 
Mortem Preparation 

HAVE you made adequate preparation to 
safeguard your family or dependents in 
the event of your death? 

This is a subject which is not by any means a 
pleasant one to discuss, but it is one of the most 
important matters for every man to know if he 
desires to protect those who are dependent upon 
him. There is a certain amount of hesitancy in 
attending to these items, because no one desires 
to think of the possibilities, but it is the unselfish, 
careful man who does think of and attend to 
such matters, and no one enjoying the finer quali- 
ties of mind and sensibility desires to be classed 
with the selfish and inconsiderate. 

There are three distinct steps to be taken in 
making such arrangements : the first is arranging 
the estate, no matter how small, so that it may 
be easily handled for the best interests of the 



OUGHT TO KNOW 19 

heirs ; the second is placing of the increments of 
the estate in such a manner that the beneficiaries, 
even during the life of the owner, are able to 
derive full benefits with the least risk; and the 
third and most important step is the matter of 
the will and the executor. 



The Investments 

Taking into consideration the fact that the 
ow r ner of an estate which will ultimately be used 
for the purpose of giving income to dependents, 
desires it to fulfill the original purpose, there are 
three important items for careful consideration. 

The first item is to have the various increments 
invested so as to bring a good return with more 
than reasonable safety. With the exception of 
owning a home, property is not the most desirable 
element to consider. However, if the home 
exists during the life of the husband and father, 
it should be one which can be kept up from the 
income derived from the remainder of the estate. 
It should certainly not be encumbered with mort- 
gages or any kind of a lien. It would be far 
better to dispose of all equity in even home 
property and arrange for rental, if there is the 



20 WHAT EVERY INVESTOR 

chance of dependents falling heir to encumbered 
property (real estate). 

Having arranged to make the homestead free 
from all possible encumbrances, the next step is 
to make the investment. These investments 
should not be allowed to yield much over five and 
one-quarter per cent. If the flat yield does go 
over this figure, it is very possible that there may 
be one or two items which will be liable for total 
loss and thus decrease the income. A reasonable 
arrangement is this (basing the total value of the 
estate at $20,000) : 

Home and property unencumbered $ 4,000 

Actual cash in Trust Co. 2% interest 1,000 

Guaranteed mortgages, 5% 5,000 

Real first mortgage, R. R. bonds, 4}4% 5,000 

Real first mort Industrial bonds, 5% 2,500 

A good list of preferred stocks, S T / 2 % 2,500 

Total $20,000 

The cash in the trust company should be a 
liquid reserve fund to meet any unexpected con- 
tingency. It should never be touched unless in 
a case of absolute necessity. The trust company 
is the best depository for such a fund, because 
it gives the depositor a better rate of interest, and 



OUGHT TO KNOW 21 

is just as safe as any other form of banking. It 
would be best to have the deposit in one of the 
larger trust companies of the nearest large city. 
The local National bank could be used for de- 
positing the income and for a checking account. 

The guaranteed mortgage should be one of a 
duration of not less than ten years, and backed 
by the best title and guarantee company available. 
It is well to investigate the actual property on 
which the guaranteed mortgage is a participation 
whenever possible, but if the guarantor is well 
known as reliable, it is reasonably safe to accept 
his word for the basis of the mortgage. This 
kind of a mortgage permits the owner to be free 
from all complications of a legal nature. 

The real first mortgage railroad bonds are 
differentiated from so-called first and refunding 
mortgage bonds. A bond like Iowa Central 1st 
and refunding 4 per cents, would never do. The 
name is a misnomer, for the first mortgage con- 
sists of a very small proportion of mileage and 
the first lien on a bridge. The help of a good 
financial service and also of a trust company 
should be called in to judge this item of the 
estate as well as all other iterr^s mentioned. 

The first mortgage industrial bonds are classi- 



22 WHAT EVERY INVESTOR 

fied similar to the Central Leather Co. 1st 5 per 
cent, bonds, or the Bethlehem Steel Co. 1st 5 per 
cent, bonds. There are very many excellent ex- 
amples of this form of investment, but the inves- 
tor must be very sure not to be deceived as to 
the bonds being a first lien and having the back- 
ing of the entire resources of the corporation. 

The preferred stocks should be chosen from 
the tried field. Not only should the past history 
of the company be investigated in a thorough 
manner, but the record of dividends over a period 
of years and a complete study of the outlook for 
the future should be made. Good investments 
in the railroad field such as Atchison Preferred 
and Union Pacific Preferred or even in the 
Industrial field such as U. S. Steel Preferred or 
National Lead Preferred are examples of this 
particular form of investment. 

An alternative of a very safe nature would be 
to substitute one of the Government (Liberty 
Loans) for a first mortgage bond of the railroad 
variety. The investments should not be made in 
more than $1,000 in each kind of railroad bonds 
or more than $500 in each class of industrial 
bonds and preferred stocks (on the $20,000 
basis). Attention should be given also to a 



OUGHT TO KNOW 23 

thorough geographical distribution so as not to 
have the liens covering one locality. 

How to Make It Easy for the Beneficiary 

If the father or husband in going to fight for 
his country and the expectation of his return to 
his dependents is doubtful, or even if the estate 
is to be arranged for easy liquidation after death, 
there are important steps to be taken. 

Should the owner be a resident of New York 
State he must take into consideration the law 
. which places a tax on all bonds. The bonds 
should be made tax exempt by paying the costs 
at once. This covers a period of five years. 
Should the bonds not be made tax exempt the 
State authorities will step in when inventory 
of the estate is taken and charge a large in- 
terest item in addition to the regular tax involved. 

Each share of stock should be endorsed in 
blank and properly witnessed and dated. In the 
event of the owners' non-return the stock will 
not have to be transferred for sale or to go 
through endless red tape to have the dividends go 
to the proper parties. 

The bonds should be registered as to principal 



24 WHAT EVERY INVESTOR 

and interest whenever possible, and the owner 
should furthermore make out separate bond 
powers in blank, having them properly dated 
and witnessed in the same manner as the stock. 
The guaranteed mortgage could easily be made 
out to two parties so that in the event of the 
death of the head of the family the proper ben- 
eficiary would have little difficulty in acquiring 
the full title. 

During the life of the family head, the item of 
cash in bank should be to the credit of a joint 
account so that no embarrassment w T ill come to 
the heirs when the need of the "rainy day" sur- 
plus comes. Without question the homestead 
should be placed in the name of the one to whom 
it is destined ultimately to go. There are no 
other means to get away from legal red tape 
unless this idea is fully carried out. 

An Alternative 

If for any reason the head of the family about 
to depart for war or in arranging his ante-mortem 
affairs does not desire to go so far in these safe- 
guards, there is the alternative of using the 
services of the trust company. Any trust com- 



OUGHT TO KNOW 25 

pany will help conserve the total property during 
the lifetime of the owner by creating a trust for 
one's own benefit. This trust can also be ex- 
tended for the benefit of the family after death. 
The trust company takes entire charge of all the 
property at a very nominal sum and will do all 
the work of collecting and disbursing the income 
both during the absence of the head of the family 
or in the event of his death. There is no limit 
to the kind of trusts which may be created, so 
that there is no excuse for the head of the family 
not taking advantage of this form of protection. 

In addition to this, it is possible for the trust 
company to safeguard all the increments of in- 
vestment during the life of the principal, without 
creating a trust. Such a form of procedure per- 
mits the father or husband to invest with a little 
higher rate of interest than that allowed under 
pure trusts. The company will keep these invest- 
ments in a private vault, collect and disperse all 
items of income, and, furthermore, look after the 
individual securities so that they will not lose 
from improper watching. 

It is difficult to overestimate the value of the 
trust company's services under such conditions. 



26 WHAT EVERY INVESTOR 

Keep Records 

A complete list of all securities owned by the 
estate should be left enclosed with the will and 
another copy given to the principal beneficiaries. 
In this way there exists a complete check on the 
estate and a safeguard against any crooked deal- 
ing. The deed for the homestead and all receipts 
denoting that taxes have been paid to date should 
be a part of the contents of the safe deposit vault 
or go to the trust company handling the business. 
The deed must be entered on the county records 
and all papers relating to the insurance of the 
title to the property or fire insurance on the home 
should be attached. A personal property inven- 
tory of effects belonging to the household show- 
ing the location and original cost should be a 
part of the records, for this is a very necessary 
item of proof for collection in case of fire. 

An Executor 

A trust company is a thousand times safer 
than an individual for the purpose of conserving 
the estate, either on the basis of trusts while 
living or executor duties after death. The trust 



OUGHT TO KNOW 27 

company cannot charge more than the legal rate 
for such duties and in addition to this feature 
there is no possibility of undue risks such as 
arise in a one man trust proposition. 

The head of a family often has a close friend 
in whom he has implicit confidence. He thor- 
oughly believes that this friend will do more for 
his dependents than a trust company. He does 
not take into consideration the personal element 
which exists wherever the individual is con- 
cerned. This element is that, because a man is 
human, he may be swayed by ulterior influences 
even if under bond to protect the estate. This 
friend may become seriously incapacitated men- 
tally or physically. He may die soon after or 
before the family head, or his personal affairs 
may become so pressing that his time is not given 
to the interests of the estate or trust which he 
controls. It is neither doing the heirs or depend- 
ents a favor, nor is it doing the trustee or 
executor a favor to put him in this position. 

The employment of a trust company in the 
fiduciary capacity is the only rational method of 
procedure. The trust company performs its acts 
strictly in an impersonal method, under stringent 
laws of control and through committee decisions. 



28 WHAT EVERY INVESTOR 

Two heads are better than one and two or more 
experienced heads are infinitely better than one 
possibly very inexperienced head. 

Eliminate Legal Items 

In addition to the care in selecting a competent 
trustee or executor, the warrior about to leave 
for probable death must try to eliminate as many 
legal complications as possible. There is nothing 
which will eat up an estate so quickly as to get 
it tangled up with law expenses. There is cer- 
tainly a place for the legal element in our 
worldly afifairs, but the more the law and lawyers 
are kept away from an estate or trusteeship, the 
greater is the a'mount conserved for the depend- 
ents. The trust companies all maintain legal 
departments, which service comes under the reg- 
ular expense of administration. The extras are 
done away with and the costly red tape is pre- 
vented to the distinct advantage of the benefi- 
ciaries. 

The Will and the Executor 

Every man without exception should make a 
will. If he dies without a will the law steps in 



OUGHT TO KNOW 29 

with all its costly features and regardless of the 
actual needs of the heirs, settles according to 
law and not according to reason how the estate 
should be divided. There are set rules for the 
division of an estate when the owner dies with- 
out a will. In addition to this it is the usual 
custom for the courts to appoint the administra- 
tor who is nearest of kin without much regard 
for his or her ability to administer. In this way 
much money, both from income and principal, is 
lost. By all means do not neglect to make a will 
if it is your desire to give those dependent upon 
you the full benefit of what you wish them to 
have. 

Make the will just as short as possible. The 
more words used in a will offer greater oppor- 
tunities for ambiguity and therefore legal com- 
plications. If the testator can compress the will 
into one or two simple paragraphs, there will be 
a greater chance for the will to stand. 

One excellent method is to place the invest- 
ments in the names of those to whom the will 
directs they shall go, before the death of the 
head of the family. Such beneficiaries may sign 
the certificates in blank or give unfilled-in 
powers-of -attorney for the bonds. The invest- 



30 WHAT EVERY INVESTOR 

ments are therefore negotiable during the life 
of the owner, though not in his name. If you 
own 5 shares of Atchison preferred stock and 
desire it to go to your wife, Jane Smith, after 
you die, so designating this amount in your 
will, have the transfer made, at the time of pur- 
chase, to Jane Smith. Jane Smith may then 
endorse the certificate in blank and it is usable 
for your own purposes during your life and you 
may sell or change your purpose at any time, 
for the stock has been made negotiable. 

Either have your own lawyer draw your will 
or have the trust company do it for you. Do not 
attempt a holographic or home made will. The 
law has a language all its own and the layman 
is absolutely unacquainted with it. A number 
of years ago one of the justices of the Orphans' 
Court of Pennsylvania drew a full and com- 
plicated will. He had been passing on the valid- - 
ity of wills for years and yet his own will was 
easily broken. Very few doctors can cure their 
own diseases and very few lawyers can do their 
own legal work. It is therefore best to follow 
the plan of brevity and clearness if it is your 
desire to properly safeguard your dependents. 



OUGHT TO KNOW 31 

What an Executor Must Know 

Above all else do not make a relative, or any 
other single person, whether friend or lawyer, 
the executor of your will. Here are a few 
"qualifications for an executor" suggested by 
H. A. Blodgett in his pamphlet of that name: 
Real estate values, the true value of various 
classes of securities, the trend of the money 
market, the laws and ordinances affecting prop- 
erty, including the Federal Income Tax Law, 
the Inheritance Tax Law, the Exempting of 
Bonds and Trust Funds. He must also have 
a good knowledge of reports constructed in legal 
form, bookkeeping, and legal accounting. He 
must be a man of keen knowledge and experi- 
ence and he must not have any partiality for one 
heir over another. In fact, the foregoing are but 
a few requirements for a mediocre executor. 
Why not be on the safe side and employ a com- 
petent trust company in the first place? 

When a trust company is employed with the 
expectation of handling all the financial details 
of the man who is leaving for the "front" or 
intends to be away for an indefinite period, the 



32 WHAT EVERY INVESTOR 

Trust Fund is the instrument utilized to effect 
this financial relationship. 

This Trust Fund will take charge of all the 
property of the soldier or traveler. Without his 
assistance it will collect his income from every 
available source, pay his taxes, insurance, fixed 
expenses and in addition will invest his surplus 
from the accrued income or either remit the pro- 
ceeds of the income to him or to some one whom 
he may designate. 

A complete and understandable statement of 
all such transactions is rendered periodically to 
the owner and, in case of his death, the Trust 
Fund will be transferred to the beneficiaries 
either designated in the Trust Agreement or in 
his will. 

"The Trust Company acts as representative 
for living or dead in practically every legal rela- 
tion in which an individual can act. It must not 
only keep intact the estate of which' it has charge, 
but must safeguard the interest of every bene- 
ficiary." * 

The writer has endeavored to point out the 
safest and best methods for the soldier who is 

* Ralph W. Davis. 



OUGHT TO KNOW 33 

leaving for the front or the careful man who 
hopes to best conserve his estate for his depend- 
ents. The trust company is a national institu- 
tion. Its business is the safekeeping of securi- 
ties, the management of property and the 
collection of incomes. These items are as much 
in its province as the care of teeth is the real 
business of the dentist. One does not go to the 
lawyer with a bad molar, therefore why permit 
an inexperienced man to guard all you own 
which you purpose to be left for the comfort of 
your wife or children? 

The Summary of Precaution 

When going away to fight for your country 
or preparing your estate for your dependents in 
case of your death : 

Be careful to choose good and diversified in- 
vestments. 

Have them carefully analyzed by experts be- 
fore purchase. 

Keep sufficient ready money within easy reach. 

Do not invest in real estate except for a home. 

Do not attempt to get too large an income. 

Permit a good trust company to handle the 



34 WHAT EVERY INVESTOR 

estate for you if you are called away from home 
to service. 

Establish a trust fund during your lifetime. 

Keep your securities negotiable and endorsed. 

Insure land titles and register all deeds. 

File all tax bills with your deeds. 

Tax exempt all bonds. 

Make a short will, uncomplicated in form. 

Make the trust company your executor. 

Have periodical analyses of your holdings. 

Make provision for "switching" an investment 
if it appears to have turned out badly. 

Keep as far away from law courts as possible. 



OUGHT TO KNOW ' 35 



CHAPTER III 



What Is a Bond? 

How It Is Underwritten and Marketed — Why 
is a Bond Necessary? — -What Happens to 
It? 

THE Great War has demonstrated the effi- 
ciency of the aeroplane. Men with ability 
and foresight — also capital — realized the 
profitable future for this aircraft business. It 
was for this reason that the Phantom Aero Co. 
was formed (Invented by the author for the pur- 
pose of illustration). 

During the first few years of existence, this 
new company experimented, changed and reor- 
ganized. Incorporated under the laws of New 
Jersey, there existed a capital account of 
$25,000,000, half preferred stock and half com- 
mon stock. In 1917 the great test came. The 
United States Government entered boldly into 
the world struggle, and the great need was for 
aeroplanes. The Phantom Co. had not made 
money. Its both classes of stock had sold far 



36 WHAT EVERY INVESTOR 

below par. The seven per cent, preferred had 
never paid a dividend, and the common had been 
the football for speculative operations. The ad- 
vent of aeroplane demand had created new possi- 
bilities and eager investors had purchased both 
classes of stock until the preferred was quoted at 
60 and the common at 15. The credit of the 
company had advanced on account of new con- 
ditions. 

The affairs were conducted by the officers, 
elected by a board of directors, who, in turn, 
were elected by the stockholders. The present 
set of officers happened to be efficient. At a 
meeting of the board of directors, President 
Smith spoke. 

"Gentlemen, this company must grow. We 
have the patents and the manufacturing plant; 
we also have the orders. But, it isw costing us 
too much to do business, as we lack sufficient 
working capital. We are paying an exorbitant 
rate of interest for loans and our credit is limited 
on account of the small deposits we carry. 
What must be done ? What can you propose to 
give us an opportunity to make large profits for 
our stockholders?" 



OUGHT TO KNOW 37 

The treasurer, a comparatively young man 
named Brown, immediately suggested, 

"Bonds I" 

"We need at least $5,000,000 working capital," 
he said, "and this is costing us over 6 per cent., 
or about $320,000 each year. Our credit is now 
excellent among investors, and I believe that we 
will save money by issuing a 5 per cent, bond." 

The directors decided upoln this method of 
financing, and the plan was presented at a meet- 
ing of the stockholders. Over 50 per cent, of 
the stockholders endorsed and voted for this 
issue, for the saving features were clearly notice- 
able. 

$5,550,000 bonds sold at 90 = $4,995,000. 

Interest at 5 per cent, on $5,550,000 = $277,- 
500. 

Saving on interest every year $42,500. 

Twenty-five year need for borrowing $1,062,- 
500 saved $555,000. Premium loss deducted 
from the $1,062,500 equaled $507,500. Interest 
saved, which would be used to apply to redemp- 
tion. 

Of course, a sinking fund was established to 
raise, during the 25 years, the capital to meet 



38 WHAT EVERY INVESTOR 

the bonds when due, but this phase would have 
to be supervised by the lawyers and the trustee. 



The Banking Firm 

Treasurer Brown took a trip to New York, 
and arranged a meeting with Mr. Lee, of Lee, 
Green & Co., prominent and wealthy bankers. 
At the first conference he said, "Mr. Lee, the 
Phantom Co. desires to issue $5,550,000 25-year 
5 per cent, bonds. You will, of course, make 
a thorough examination of the company and give 
us your verdict. There is no need for me to go 
into details because your experts will give you 
the facts. When may I expect a decision?" 

"Within the next thirty days." 

About four weeks later Treasurer Brown re- 
ceived the following letter : 



Dear Sir : 

The reports of our investigators in the matter of 
the Phantom Aero Co. — re proposed bond issue — have 
been filed. We will take over the entire issue of 
$5,550,000 — 25 year 5 per cent, bonds at a flat price of 
90. If you accept, kindly arrange to have your law- 
yers confer with Messrs. Dundee & Co., our attorneys, 
and at that time the adoption of the trustee, the terms 
of the mortgage, the indenture and other incidentals 



OUGHT TO KNOW 



39 



will be arranged. If the conference agrees, we will be 
prepared to act at once. 

Very truly, 

Lee, Green & Co. 

After the lawyers had agreed on the form of 
the bond, the provisions regarding interest, sink- 
ing funds, and the equity to protect the principal, 




Bond and Coupons 



40 WHAT EVERY INVESTOR 

the Standard Trust Co. was called in to act as 
the trustee. 

For a commission the trust company agreed to 
act for all those who would buy the bonds. The 
Phantom Aero Co. executed a mortgage in favor 
of the Standard Trust Co., which stated that all 
the property owned by the Phantom Co., esti- 
mated at a sale price of $15,000,000, would be 
placed in the hands of the Standard Trust Co. to 
protect the lenders. In addition the Phantom 
Co. agreed that if the interest funds, to be paid 
out semi-annually by the trust company, were 
not forthcoming at the proper date, the trust 
company would have the right to confer with 
the bond holders and sell the equity back of the 
mortgage. The Standard Trust Co. agreed to 
pay out the interest when due and the principal 
when due, to the holders of the coupons or the 
bonds. These papers were made out by the law- 
yers on both sides, properly registered in the 
records of the county where the property was 
situated, and temporary certificates of indebted- 
ness were issued to the bankers, Lee, Green & 
Co., until the actual bonds could be printed. 

The firm of \Lee, Green & Co. paid the 
Standard Trust Co. $4,995,000, which was de- 



OUGHT TO KNOW 41 

posited to the credit of the Phantom Aero Co. 
for its own use. An arrangement was also made 
that the Standard Trust Co. should act as de- 
pository for the Sinking Fund, an amount set 
aside each year out of the earnings and interest 
saved, to pay the principal when the 25 years 
was up. 

It must be noted here that the Phantom Aero 
Co. has its money. It must pay 5 per cent, on a 
loan of $5,550,000, for which it only received 
$4,995,000. The rest of the proceedings is en- 
tirely in the hands of Lee, Green & Co. The 
Phantom Co. might have made arrangements to 
offer this loan to its stockholders direct, but it 
was safer to put it in the hands of the bankers, 
and much cheaper. It is now up to the bankers 
to make their profit. 

The Distribution 

Lee, Green & Co., with the consent of the 
Phantom Aero Co., sent out a notice to all the 
stockholders of the company that until a certain 
date such stockholders will be permitted to sub- 
scribe to these new bonds at 95. Each stock- 
holder owning 100 shares of either class of stock 



42 WHAT EVERY INVESTOR 

may purchase $1,000 of this loan at $950, and a 
certificate known as "Right to Subscriber'' is 
sent to each stockholder of record on a certain 
date. Depending on the terms of the indenture 
and the price of the stock, these "Rights" are 
valuable or they are not valuable. The stock- 
holder may either exercise his option or he may 
sell it to some one else. In any event, on the 
date set, the subscriptions are counted, and we 
will suppose that only $3,000,000 is taken by the 
stockholders of the company. This leaves 
$2,550,000 in Lee, Green & Co.'s hands. 

The Syndicate 

Before beginning the sales campaign with the 
stockholders, Lee, Green & Co. called into con- 
ference four other banking or investment firms. 
The data regarding the Phantom Aero Co. was 
submitted and the other firms agreed that this 
was an opportunity for profit. They formed an 
agreement to take over at 95 all the unsold bonds 
and to make Lee, Green & Co. the manager of 
the syndicate. They also agreed to "withdraw 
from sale" all bonds allotted to them until the 
disbanding of the syndicate. This gave Lee, 



OUGHT TO KNOW 43 

Green & Co. a profit of 5 points on all the issue. 
The only possible loss in this connection could 
happen in case their proportion of the syndicate 
allotment could not be sold. 

The members of the syndicate agreed to sell 
these bonds at 98 to the general public, and at 
no other price. Each member of the syndicate 
had a list of regular customers who were eager 
to get the bonds at 98, because they were vouched 
for by such well known firms. In addition to 
this, each firm had a corps of trained bond sales- 
men. The head of the sales department called 
these men in conference, distributed to them all 
the facts and figures, and then lectured to them 
on the qualifications of this particular bond issue. 
Every phase of the mortgage, the business of 
the company and the peculiar worth of the loan 
for certain classes of investors was thoroughly 
discussed. Questions were asked, and the head 
salesman constituted himself as a prospective 
purchaser, and the salesmen attempted to sell 
him the bonds. After all possible questions had 
been settled, these men were sent out to do what 
they could. 

After the prospects had been seen and the field 



44 WHAT EVERY INVESTOR 

of regular customers thoroughly covered, the 
salesmen were called in and the syndicate man- 
ager reported to the firms that only $1,000,000 of 
the bonds remained unsold. 



The Public Offering 

The advertising and publicity campaign was 
now ready for the final distribution. Announce- 
ments were made in all the leading daily, weekly 
and fortnightly financial publications that on 
September 1st next, the books of the various 
firms composing the syndicate would close for 
subscription to the Phantom Aero Co. 5 per cent, 
first mortgage bonds, due 1942 at 100. Litera- 
ture about the company was sent to investors all 
over the country, and the advertising followed up 
by attractive articles about the Phantom Co. On 
September 1st the books of the syndicate closed. 
The syndicate manager, Lee, Green & Co., made 
an accounting to the other firms of the syndicate, 
and it was found that only $250,000 of the issue 
remained unsold. This amount was divided pro 
rata according to the various interests in the 
syndicate, and each one had a right to sell the 
bonds as desired. 



OUGHT TO KNOW 45 



Who Profited? 



The reader will easily follow the various items 
of profit which grew out of this bond issue. In 
the first place, the Phantom Aero Co. got its 
money at once in one block without any trouble. 
In the second place, the firm of Lee, Green & Co. 
got a profit of 5 points, or $50, on each $1,000 
bond sold to the stockholders. In the third 
place, Lee, Green & Co. got a profit from the 
sale of the remainder to the syndicate at 95. In 
the fourth instance, Lee, Green & Co. and each 
other member of the syndicate made a profit sell- 
ing to their chosen customers at 98. And lastly, 
the entire syndicate made a small profit in addi- 
tion by selling to the general public at 100. 

The Expenses 

The expenses were quite large, and probably 
amounted to at least 3 points on the total issue 
of bonds. 

In the first place, there was the cost of investi- 
gating the Phantom Aero Co. These investi- 
gators were high salaried men, and the incidental 
cost of travel and overhead office expenses must 



46 WHAT EVERY INVESTOR 

be included. Then followed the fees for the 
lawyers and the fees for local and state legal 
necessities. Possibly the bonds were made tax 
exempt at the time of issue. Thirdly, the print- 
ing for the temporary certificates, circulars and 
agreements; next the advertising cost and sales- 
men's commissions, and last but not least, the 
postage and so-called incidentals. 

What Happens to the Bonds? 

It is the custom for well established firms to 
stand back of their bond ventures. Lee, Green 
& Co. are no exceptions to this rule, and they 
are ready to buy back at a slightly reduced con- 
cession bonds which investors desire to sell. 
Other firms enter into the field of buying and 
selling these bonds so that a "market" is estab- 
lished. It may be that the firm of Lee, Green & 
Co. desire to establish a more desirable "mar- 
ket," so that application is made to list these 
bonds on the New York Stock Exchange. The 
advantage for the owner by such listing is that 
the bonds become better collateral for loans. 
There is no other advantage except possibly a 
little closer "market" for purchase or sale. Some- 



OUGHT TO KNOW 47 

times the investor is better off if his bonds are 
not listed on the New York Stock Exchange. 
These Phantom bonds, not being listed, are not 
the football of speculation, but are more or less 
protected by Lee, Green & Co., whose reputation 
is at stake. They may have passed through 
hundreds of hands, but no matter who has had 
them, the money is being loaned to the Phantom 
Aero Co. 

The interest has been paid regularly, and in 
1942 the holder notes that the principal is due. 
Each year of the twenty-five, the Phantom Aero 
Co. has been putting aside enough out of earn- 
ings to eventually pay off these bonds. The pro- 
portionate amount involved for each year is 
mathematically computed, which taking accrued 
interest into consideration, involves a problem 
quite out of the customary mathematical calcula- 
tions. At the date of expiration the Phantom 
Co. pays the Standard Trust Company the 
amount of the mortgage. The mortgage is re- 
leased and the Standard Trust Co. pays off the 
various holders of the bonds according to the 
terms of the original indenture on the bonds. 



48 . WHAT EVERY INVESTOR 



CHAPTER IV 

Gauging Personality 

What the Investor Should Know About the 
Officers — Technical and Business Skill 

PERSONALITY enters into every phase of 
business as well as art or pleasure. The 
Motion Picture Company with Charley 
Chaplin or Douglas Fairbanks as a star has a 
much better prospect for profits than a company 
whose actors are unknown. But even with these 
stars to get the business, the management may 
lose money by injudicious salary payments and 
wasteful stock jobbing propositions. So, in every 
instance the research work for the investor 
comes to the same end. 

Who Is Managing the Company? 

In the previous chapter, the bond issue of the 
Phantom Aero Co. was discussed. The ultimate 
reason that the bonds of the company were 



OUGHT TO KNOW 49 

accepted by the investment firm and sold by 
them was, not only because the actual business 
as a business was vouched for by the investiga- 
tors employed for the purpose, but because the 
investment firm believed in the capabilities and 
business acumen of the management. President 
E. P. Ripley of the Atchison Railroad once had 
the choice of positions with the Rock Island Co. 
or the Atchison, Topeka and Santa Fe. He chose 
the latter and the Rock Island Co. fell into the 
hands of managers who were more interested in 
the stock market part of the business than the 
railroad. The Atchison is firmly established as a 
good investment, while the Rock Island disinte- 
grated and went through receiver's hands. 

The prospective buyer of Phantom Aero Co. 
5 per cent, bonds should be perfectly satisfied 
with the men who are managing the company. 
The investor has one piece of evidence in favor 
of investing. The good firm of Lee, Green & 
Co. would hardly have undertaken the under- 
writing of the issue unless they were satisfied. 
This is the first reason why the prospective 
investor should consider the purchase of Phan- 
tom Aero Co. 5 per cent, bonds. But he should 
not rest with the bare word or on the action of 



50 WHAT EVERY INVESTOR 

the Investment Firm without personal investiga- 
tion. The following analysis of a corporation 
of this nature was suggested recently by Prof. 
Charles W. Gerstenberg, president of the Amer- 
ican Association of Financial Statisticians : 

"1. What is the integrity of the management? 

"2. Does the enterprise possess technical skill ; 
are its processes stabilized, and improved as far 
as technical skill can take them? 

"3. Does the management possess business 
skill, is it shrewd, are its distributive functions 
well organized, is it meeting competition success- 
fully? 

"4. Does its management possess financial 
skill ; has it committed itself in the past to finan- 
cial obligations that would be injurious or preju- 
dicial to new capital ; has it mortgaged the future 
as well as the past in such a way as to interfere 
unduly with future expansion ? 

"5. Is the business reasonably free from legal 
interference ?" 

Therefore, without going into the intricate 
duties of the trained statistician, let us see what 
the average man can learn about the bonds of 
the Phantom Aero Co. and its management, be- 
fore making his investment. It is well to follow 



OUGHT TO KNOW 51 

the outline of Prof. Gerstenberg in summing up 
the results. 



The Management's Integrity 

The prospective investor would of course in- 
vestigate the reliability of Lee, Green & Co. It 
would be definitely established in his mind that 
unless the Phantom Aero Co. was a good, going, 
well managed concern, its bonds would not be 
recommended by such a well-known investment 
firm. On the other hand, there might be pos- 
sibilities which would determine Lee, Green & 
Co. to undertake this issue, which would not 
be in accord with the judgment of the individual 
investor. 

An examination of the personnel of the Phan- 
tom Aero Co. discloses the following officers : 

President, John Smith. A graduate of Har- 
vard, class of 1890, studied law and later a 
member of the firm of corporation lawyers, 
Eckert & Smith. After a successful career be- 
came associated with Sword Auto Co. as its 
secretary and legal adviser. Was instrumental in 
reorganizing a number of defunct industrial con- 
cerns and is a member of many important clubs. 



52 



WHAT EVERY INVESTOR 



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OUGHT TO KNOW 53 

Vice-President and General Manager, Abram 
Spencer. Graduate of the Massachusetts School 
of Technology 1900, engineer with experience 
in many mechanical products. Inventor of note 
and employed by the U. S. Government in an 
advisory capacity. Has written various articles 
for technical magazines and is not well known 
except to those who are in his immediate pro- 
fession. 

Secretary-Treasurer, Thomas Brown. Com- 
mon and high school education. Entered busi- 
ness as a stenographer, later becoming private 
secretary and confidential man for the great N. 
H. Muran, founder of many prominent industrial 
corporations. Is very well known among finan- 
ciers and is credited with many friends and busi- 
ness connections in the New York financial dis- 
trict. 

Directors. Three well known bank officials, 
also three men whose names are fairly well 
known in the business world and four others 
who are directors in many other corporations. 

A careful reading of the short general biogra- 
phies of the dictators of the Phantom Aero Co. 
by the prospective investor would establish in 



54 WHAT EVERY INVESTOR 

his mind that "Integrity" is one of the main 
elements. All those who are in charge have had 
business experience in varied lines of endeavor. 
Some of them may have had failures. So much 
the better for the company. If a leader of an in- 
dustry has experienced one or two failures and 
he is known to be honest and is "Integrity Per- 
sonified," he will be all the more capable. He 
will know what previous mistakes to avoid. 

Processes Stabilized— Technical Skill 

It would most certainly seem to the investor 
that the officers and directors would not have 
been men to offer a proposition to the general 
public unless they were certain that they knew 
how to manufacture aeroplanes and motors. 
However, even men of this type may be deceived 
as well as the layman investor. An inquiry re- 
garding what the other members of the same 
trade think and a look at the product itself from 
the viewpoint of what effective service has been 
done would be necessary. 

It is easily discovered by the investor that the 
Phantom Aero Co. has had a very hard time to 
procure just the right kind of steel with which 



OUGHT TO KNOW 55 

to construct motors. 'It is also a public fact 
that much money has been spent on experiments 
and that even now the process of construction 
may have to be changed. On the other hand, 
the planes are in active service in this country 
and the consensus of opinion in the general trade 
is that they are the best made in this country, 
although they do not reach the efficiency of the 
European manufacturers. The deduction for the 
investor is that the element of chance makes 
the investment not nearly so good as it other- 
wise might be. The other viewpoint is, " Some- 
one will succeed and it is more likely the Phantom 
Aero Co. than any of the others/' 

The processes, therefore, are not really sta- 
bilized, but how about the technical skill? 

Out of all the officers and directors, the vice- 
president and general manager Abram Spencer 
is the only one having what might be called a 
modicum of technical skill. At first glance, there 
does not appear to be a real expert in aero-manu- 
facture. Further investigation, however, would 
reveal that the consulting engineers, not men- 
tioned in the catalogue of officers, are among 
the best in the world. Men formerly with the 
Wright and Curtiss companies and experts from 



56 WHAT EVERY INVESTOR 

abroad are on the salary roll. Without such 
men, the investment would be very risky. With 
these men, the possibilities for profitable busi- 
ness are vastly increased. 

Business Skill — Competition 

A resume of the business histories of the offi- 
cers and directors easily proves that each of 
them is qualified in the business world. The 
president has not only had a theoretical training 
but a practical training. The secretary-treasurer 
has had a thorough business education and the 
directors are men of experience and known abil- 
ity. There seems to be nothing of a serious ad- 
verse nature in the study of this element and it 
is therefore a mark in favor of the investment 

The competitive feature is a little more inter- 
esting and is not so favorable for the investor. 
In looking over comparative records of other 
companies, we find that these other companies 
have been able to manufacture planes at a much 
less cost. Why is this so ? Careful investigation 
shows that the purchase of raw material was 
made by the others at less cost per unit. The 
competitive companies also have been able to 



OUGHT TO KNOW 57 

turn out more machines so that just now there 
appears to be something wrong. Further and 
closer analysis of the statement shows that the 
working capital is very small. It is therefore 
evident that a bond issue would help to solve the 
problem. 

Does the Management Possess Financial Skill? 

Looking back at the list of officers and direc- 
tors of the Phantom Co., the investor notes 
that the secretary-treasurer and seven of the 
directors are either practical or theoretical finan- 
ciers. This feature is quite in favor of the com- 
pany and would be a factor conducive to invest- 
ing in the company. It stands to reason that 
these men must necessarily have sufficient ability 
to carry the Phantom Co. through serious finan- 
cial difficulties. 

Committed to Financial Obligations? 

Up until the new bond issue, outlined in the 
preceding chapter, of this series, there has been 
no definite financial policy pursued by the offi- 
cers and directors. The company, in the past, 



58 WHAT EVERY INVESTOR 

has been run with the capital gained by the sell- 
ing of shares and whenever additional working 
capital was needed, it was borrowed from the 
banks on short time direct notes. The general 
financial policy had been too cautious rather than 
too careless. An examination of the quarterly 
reports to the stockholders also shows that a 
comprehensive system of accounting exists which 
has been properly audited. There is nothing in 
the statement which could be hid from the aver- 
age investor and so far as can be learned there 
are no " jokers" to deceive the layman. 

The initiative of the directors in advising a 
bond issue to gain more working capital is laud- 
able for it should put this company on a par with 
its competitors. In addition, the method of dis- 
tribution of the bond issue, its sinking fund 
clause, and the assets back of the mortgage, all 
are in its favor. So far as this statistical ele- 
ment of investigation is concerned, the investor 
has everything in his favor. There is no past sin 
hanging over the financing and if the business 
continues to prosper, there is no reason on the 
face of recent financial and managing ideas to 
prevent further funding schemes which will not 



OUGHT TO KNOW 59 

interfere with the present issue. The company 
has not mortgaged its future. 

Free from Legal Interference? 

This is a most important subject for the pros- 
pective investor to consider. It is most fre- 
quently overlooked by investors and, if nothing 
is noted in the records, the prospective purchaser 
of bonds or stocks should make sure of this 
condition through the investment firm bringing 
out the saleable issues. Any manufacturing com- 
pany whose product is based on patents needs 
a thorough examination. 

The Phantom Aero Co. did not have original 
patents but purchased them from former con- 
cerns which were originally consolidated into this 
one company. The other little companies were 
practically driven out of business on account of 
necessary expenditures to defend their patents 
both on the form of plane and the motors. 
These suits were all settled before the time of 
consolidation with the Phantom Co. and the in- 
vestment firm's lawyers reported to the Standard 
Trust Co., the mortgagee, as well as their own 
firm, that court records were clear as to the non- 



60 WHAT EVERY INVESTOR 

infringement of the other patents in existence. 
Had the patents of this Phantom Co. simply 
been applied for, it is doubtful if any money 
could have been borrowed in the investment mar- 
ket. In every case the investor must investigate 
this situation. 

We have now gone over the item in connection 
with the management, both from the intimate- 
personal phase to the general-impersonal phase. 
The investor has decided that while there is a 
certain amount of risk, much greater than an 
established railroad first mortgage bond, yet the 
men who are managing the business and the 
quality of the investment firm making its finan- 
cial offerings is of such excellence that an in- 
vestment is worth while for the successful busi- 
ness man with a surplus, but not one for the 
widow or the man who only has a small sum to 
invest. 



OUGHT TO KNOW 61 



CHAPTER V 



The Bond Circular 

What It Shows the Investor— What Other 
Information Should Be Sought 

YOU, Investor, have received the bond cir- 
cular of Lee, Green & Co. describing the 
Phantom Aero Co. new 5 per cent, bonds. 
After going over it, what conclusion will you 
reach? Will you invest in these bonds? 

In previous articles, it was shown why these 
bonds were issued and also how they were of- 
fered to the public. Information had also been 
gained about the personnel of the company. 
There is now before us the circular of the invest- 
ment firm offering this investment and it is our 
duty to study it and find out what further infor- 
mation is necessary and what should be con- 
firmed in the circular. 

Is the Equity Sufficient? 

A glance at the last balance sheet shows us 
that there are $5,000,000 in securities held by the 



62 WHAT EVERY INVESTOR 

Aero Co. These securities are probably listed at 
cost price and it is very doubtful if they would 
bring one-fifth of their value if distributed to 
the bond holders. So far as they are concerned 
the importance to the mortgage is negligible. 
There is therefore left, back of the bond issue, 
$10,000,000 book value in property. The circu- 
lar tells what the property is and where it is 
located and this fact is attested to by the ac- 
countants, but the investor, to get complete 
knowledge, should incorporate this question in 
his letter to the investment firm before placing 
his money for the purchase. 

What Becomes of the Money? 

Any one loaning money is vitally interested in 
what the borrower intends to do with the money. 
In fact he is entitled to know. The circular 
particularly states that this money is to be used 
for the extension of the plant, to retire the shdrt 
term notes and provide working funds. 

It has been demonstrated to the stockholders 
that the Phantom Aero Co. is losing by heavy 
interest payments on account of borrowing cur- 
rent funds from the banks. There is no objec- 



OUGHT TO KNOW 63 

tion therefore in using the funds for this pur- 
pose. The lender knows also that in addition to 
the equity stated, the supplies purchased and the 
finished but unsold products will be an additional 
guarantee back of the mortgage. 

There cannot be much extension to the plants 
with the proceeds of the sale of these bonds, for 
after the. short term borrowing obligations are 
satisfied, the remainder will hardly be sufficient 
for further property extension. 

Will the Bonds Be Paid When Due? 

The circular distinctly states that there will be 
a sinking fund established so as to pay off the 
bonds at maturity, when they are due. A number 
of financial experts of five or ten years back 
believed that the principle of refunding, paying 
off the loan through the issuance of a new one, 
was the better plan. Their idea was that by the 
time the loan was due the company would be 
so well established and earnings so good that a 
new loan could be made at reduced interest. The 
Phantom Aero Co. is more experimental and 
in addition there are uncertain financial elements 
brought about by the world war. It is there- 



64 



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66 WHAT EVERY INVESTOR 

fore more advantageous to the investor to have' 
the sinking fund in existence. 

The sinking fund puts aside each year 4 per 
cent, of the issue. This is a little larger than 
usual, but it means that the Phantom Aero Co. 
will be able to make quite a little income from 
the sinking fund interest. It is a better financial 
arrangement to do this than to allow for the 
accrued interest on this fund to take the part of 
the ultimate principal. 

Future Mortgages on the Property 

The circular clearly states that this is the entire 
issue and that it is a first mortgage on the prop- 
erty as a whole. There is no provision for any 
future borrowing which will affect the equity be- 
hind this loan. There is nothing said in the cir- 
cular except a plain statement of facts. If there 
is to be other borrowing in the future, it will 
either have to be on a second mortgage basis or 
on new property to be acquired later. The book 
value of the real tangible assets is shown to be 
$15,000,000. If the $5,000,000 of securities held 
should be left out of consideration as problemati- 
cal, there yet remains $10,000,000 which can 



OUGHT TO KNOW 67 

never be utilized as first mortgage equity until 
• the present loan is paid. 

The circular does not clearly show whether the 
book value of $10,000,000 is an inventory after 
the $6,000,000 depreciation has been charged off. 
(Note earnings figures of $2,000,000 depreciation 
a year for each of three years.) If the ten 
millions is the value at June 30, 1917, it is most 
probable that it is carried at a figure arrived at 
after the depreciation had been charged off 
and is not the total of original purchases at cost. 

Interest Payments 

Will the Phantom Aero Co. be able to pay 
the interest and pay its quota to the sinking fund 
account ? 

The answer to this question depends upon the 
estimate and conclusions reached from a study 
of the past, the conditions of the present and a 
guess for the future. Each year has shown an 
increase in gross earnings, as noted in the cir- 
cular, and the operating expenses have increased 
also but in an orderly and fair manner. The 
circular states that large orders have been re- 



68 WHAT EVERY INVESTOR 

ceived from the government. The present, there- 
fore, is provided for. 

The future can only be judged by believing 
that the same ratio of progress will be main- 
tained. The examination of the officers and 
directorate has convinced the investor that they 
are to be trusted. It is therefore proper to sup- 
pose that the future will be advantageous to the 
Phantom Aero Co. It is inconceivable that the 
directors would permit their company to fall 
behind either in new ideas or in business get- 
ting. The possibility, of course, might conceiv- 
ably be that new patents and form of manu- 
facture might be invented which would make the 
Phantom Co. a back number. This is possible 
but hardly probable. From this viewpoint the 
investment is reasonably safe'. 

Is the Yield Sufficient? 

The yield problem is a matter of choice for 
the investor. A 5 per cent, yield during war 
times when good bonds are cheap is not too much 
for this kind of an investment. In fact, it is 
hardly enough. When one considers that Cen- 
tral Leather Co. 1st mortgage 5's are selling be- 



OUGHT TO KNOW 69 

low par as well as Southern Pacific convertible 
5 J s due 1934, it would seem that these bonds 
should yield more than 5 per cent. The fact is 
that the yield is hardly attractive enough for the 
average investor in this class of bonds. On the 
other hand, both principal and interest seem 
safe, and for the purpose of further illustration, 
we will permit our investor to make his pur- 
chase after he has had a letter from Lee, Green 
& Co., satisfying him by their answers to the 
questions which he asks them about their circu- 
lar. 

New York City, 
Sept. 5, 1917. 
Messrs. Lee, Green & Co., 

640 Wall Street, 
New York City. 
Gentlemen : 

I have received your circular relating to the new 
issue of 5% bonds of the Phantom Aero Co. If the 
answers to my questions are satisfactory, I will ask 
that you permit my subscription to $10,000 face value 
of these bonds. 

1. Are these bonds interchangeable as to coupon and 
registered? The circular did not state this situation. 

2. Kindly let me know the cost of the original invest- 
ment in the various properties mentioned in the circu- 
lar. If the original cost, including the cost of the 
buildings, approximated within two million dollars 
of the ten million in Plant Account, the equity is suffi- 
cient for all purposes of investment. 



70 WHAT EVERY INVESTOR 

3. I have not even considered the item of patents in 
the mortgage. They are of course valuable, but the 
account shows ten million for this item, which appears 
very large. It makes little difference to me as a lender 
whether the ten million charge here was offset by a 
bonus of stock to the original inventors and incorpor- 
ators, or whether it is offset by selling the stock at an 
original discount. I merely desire to know this out 
of interest or curiosity. 

4. Kindly be more explicit about the five million dol- 
lars in assets expressed as Securities Owned. Is there 
a possible market for these securities or would the 
purchased asset of the controlled companies be valuable 
only to the Phantom Aero Co.? A statement showing 
the intrinsic value of these securities with further ex- 
planation by you would lead to suggestion by me that 
I increase my original investment. 

5. Please send me a list of names of the prominent 
engineers mentioned in the Management paragraph 
of the circular. Are these men truly the best to be 
employed in the aeroplane business and have they 
long term contracts with the Phantom Co.? Unless 
you can definitely state desirable facts about this por- 
tion of the management, I would not care to risk 
my money on this loan. 

6. Has the stock got a market? As a lender I am 
interested to know what was done and is being done 
in marketing both classes of stock. It will give me 
a direct line on those interested in the company and 
also give me a working basis for judging the man- 
agement as a whole. 

In addition, I wish to know if it is your intention 
to list these bonds on the New York Stock Exchange, 
where there is an open market, if I find I need to sell 
them at any time. Or, do you expect to stand back 



OUGHT TO KNOW 71 

of these bonds with your associates, providing the 
market yourself instead of permitting the issue of 
bonds to get entirely out of your control? Either sys- 
tem of market arrangement is satisfactory, but I would 
prefer not to have the bonds listed on any exchange. 

7. The item of Supplies and Finished Planes looks 
rather large. Are these orders which have not been 
filled, or are these planes obsolete? 

8. Why was it necessary to borrow so much on this 
issue when there remained two million in treasury 
stock yet to sell? I judge that this is not the oppor- 
tune time to sell stock and that you believe that it is 
a better investment for the Phantom Co. to hold it, 
therefore getting much more in the future. 

I will appreciate the answers to these questions and 
any further information which you will give me. 

Very truly, 

M. R. Investor. 

Having decided that the yield was sufficient; 
that the equity is satisfactory; that the Phantom 
Aero Co. is likely to do a big business and make 
much more money than in previous years ; that 
the management is capable ; and that the terms of 
the issue are in accordance with what is desired 
for investment — M. R. Investor purchases the 
bonds at par. 



72 WHAT EVERY INVESTOR 



CHAPTER VI 

Speculative Bonds — Investment Stocks — Defi- 
nitions — What Is in a Name? 

MR. JOHN K.KING was in the structural 
bridge business in Cook County, Illinois. 
He had succeeded in making an excel- 
lent living and had put aside a sturdy surplus. 
One day the Big Men held a meeting and de- 
cided that it would be advisable to buy up the 
King plant. John K. was nearing his sixty-ninth 
year and decided that he had better meet the 
inevitable, but he was a keen business man and 
the result of the conference was that he had 
$500,000 cash and no business. 



John K/s Observations 

What to do with the $500,000? During the 
years of business success, John K. had con- 
centrated all his efforts on his own business. He 



OUGHT TO KNOW 73 

knew how to make money in that business and 
the effort had been strenuous. He thoroughly 
realized that he could make money, but he had 
never had any training on the subject of how 
to keep it. The surplus accruing from the busi- 
ness had been turned over and over. Now that 
he had the actual cash, he experienced stage 
fright. He appreciated the fact that the man 
who has dollars is the target for every man who 
seeks dollars. 

The problem to be met was the safe invest- 
ment of these funds, which would give him a 
good income during his remaining years and 
leave the principal intact for his two sons, who 
were at this period in school. John K. had been 
a widower for the last ten years. 

It is never too late to learn. Of course he 
had the superficial knowledge of investment 
which the average man gets in daily contact with 
worldly affairs and his mental observations sum- 
marizing this knowledge were : 

"So far as I can learn there are but five meth- 
ods of investing. I have the choice of savmgs 
bank deposits, bonds, stocks, investments in land, 
either by purchase or mortgage, or building and 
loan associations. I have read, sought advice, 



74 WHAT EVERY INVESTOR 

and investigated on every side. Each kind of 
investment has its good points and each kind has 
its evils. 

"I have therefore come to a conclusion which 
leaves me no better off than when I started. I 
have learned the terms and meanings of the clas- 
sifications but in every case I find bad as well 
as good. In plain words I want the best for 
investment and having eliminated all classes ex- 
cept bonds and stocks, I cannot find that bonds 
are better investments than stocks or stocks any 
better than bonds. It depends on the individual 
case and there is absolutely nothing in the names. 
A rose by any other name would smell as sweet. 

"My good friend Jackson, the head of a very 
conservative investment firm, tells me that I 
should buy bonds. He is of the opinion that it 
is much safer to be the creditor of a corporation 
than a partner. But my judgment tells me that 
this is not always true, for there are plenty of 
creditors who never get their money back and, 
on the other hand, there are plenty of partners 
wHo>never derive a cent from their participation 
in the business. By sound reasoning the conclu- 
sion is easily reached that: Bonds are not neces- 
sarily a good investment because they are called 



OUGHT TO KNOW 75 

bonds, and stocks are not poor investments sim- 
ply because they are called stocks" 

What the Terms Mean 

John K. King decided to plot out in as few 
words as possible the elementary definitions of 
the principal forms of corporate investments and 
make his comparisons to find out where he could 
get the best investment in each class. With 
pencil, note book and some technical volumes, the 
result was this: 

Bond — An obligation of a government, a municipal- 
ity, or a corporation, secured by promise, legal ordi- 
nance or mortgage, to pay to the lender interest and 
principal, when due, in return for a loan to said gov- 
ernment, municipality or corporation. 

a. First Mortgage Bond is one which constitutes a 
first lien upon the property. 

b. Second and Third Mortgage Bonds constitute sec- 
ond or third liens, as the name implies. 

c. Consolidated Mortgage Bonds are issued to take 
up and fund the various prior bonds. They can become 
first liens when prior mortgages are retired. 

d. Second Consolidated Mortgage Bonds are, as the 
name implies, subsequent liens to the first of their 
kind. 

e. Income Bonds are secured by mortgage on the 
income of a corporation, after prior claims are paid. 

f. Collateral Income Bonds have a protection de- 



76 



WHAT EVERY INVESTOR 



pending on certain securities deposited for the pro- 
tection of the principal — but both "-e" and "f" are 
hardly more than promissory notes. 

g. Collateral Trust Bonds are issued against collat- 
eral or securities deposited with a trustee, who may 
sell the deposited collateral to redeem the bonds if 




An Investment Stock 



conditions are not fulfilled. There are various other 
forms of Collateral Bonds such as Convertible Collat- 
eral Trust Bonds. The average investor needs a Phila- 
delphia lawyer for these. 

h. Debenture Bonds. These cannot be definitely de- 
fined. Sometimes they are no more than an unprotected 
note of the corporation and again they eventually be- 
come first mortgages and have sinking funds. The 
value depends on the character and standing of the 
corporation. 



OUGHT TO KNOW 



11 



i. General Mortgage Bonds constitute a mortgage 
on the entire system or plant. Part may be first mort- 




A Speculative Bond 



gage and part second or third. The value must be 
learned from a complete study of prior mortgages, 
j. Sinking Fund Bonds may be of any class of mort- 



78 WHAT EVERY INVESTOR 

gages and imply a reserve set aside each year to pay 
the principal when due. 

k. Improvement and Extension Bonds are issued 
against betterments, additions, etc. The investor needs 
to observe caution in this case. While they may be 
a first lien on extensions, they might also be used to 
cover up "reckless operating expenses." 

1. Car Trust Bonds are secured by mortgage on roll- 
ing stock and on non-payment the owners may seize 
and sell the cars mortgaged. 

m. Certificates of Indebtedness. Trust Company re- 
ceipts, Receivers' certificates and a host of other forms 
of obligation constitute the less used and less known 
varieties of bonds. 

The mania for issuing different kinds of bonds 
is as widespread as the tulip mania once was 
in Holland. The exact legal status of different 
kinds of bonds can only be defined by the law- 
yers. The laws of the various states affect the 
same classification in different ways. As the 
eminent writer, Edward Carroll, Jr., says : "Many 
bonds partake of the nature of several classes — 
thus a First Consolidated Sinking Fund, a Gen- 
eral Consolidated. A General or an Income 
Bond, where no second mortgage exists on a 
property, may be practically on the same footing 
as a second mortgage on another property. 

Various kinds of bonds may be Convertible 
Bonds — they may be converted into stock at a 



OUGHT TO KNOW 79 

certain time, at a certain price and under certain 
conditions. Some may be good and some bad, 
depending on the condition of the corporation 
and the terms. 

John K. King read over the above notes, which 
he had made, with considerable interest. He sum- 
marized them as interesting but not conclusive. 
He was pleased to be able to learn the various 
terms and definitions, but, as he said to himself, 
"I do not see how these definitions are going to 
help me one bit in selecting an investment; for 
they are only names at the best and any one 
name may be just as good as another. Let us 
investigate the stock form of investment. " 

The Forms of Stock 

The second part of the note book, therefore, 
summarized the story of stocks as possible in- 
vestments. As in the case of the bond, the defi- 
nitions were set down as a basis of determination 
as to the advisability of an investment of this 
character : 

"What is stock? A share of stock represents an in- 
terest in the business — not as a bondholder, who is a 
creditor, but as a partner. The more shares owned 



80 WHAT EVERY INVESTOR 

the greater is the owner's proportion in the business. 
In actual practice the small shareholder delegates his 
vote by proxy. Stock is never a lien on the property. 
It is simply the right to share in the profits and losses 
and all creditors, of any nature, must be paid first. 

"Preferred stock primarily means a form of owner- 
ship which has a preference over all other classes in 
the payment of dividends. This sounds well, but 
there are cases where the stockholder fares better by 
holding common stock. The preferred shares may 
be limited as to the amount of dividend and the com- 
mon stock may, in a successful company, get the 
largest share. Further than this, the common holders 
may have the privilege of voting — carrying on the busi- 
ness — and the preferred holders may be deprived of 
any voice in the matter. 

"There are second and third preferred shares in some 
corporations whose holders get dividends, or are prom- 
ised them, before the common holders. These, in like 
manner, may be limited as to dividend, or may have 
provisions regarding convertibility into other forms 
of corporate stock. The value of all preferred shares 
may be impaired by placing burdensome mortgages 
on the company, and in some cases, the common hold- 
ers only have the right to vote on such proceedings. 

"Common stock holders are the last to participate 
in any distribution of profits or net earnings. In ex- 
ceptional cases, where net earnings are very large and 
a limit is placed on dividends to anterior issues, the 
common holders get the greatest share. 

"Assessable and non-assessable stocks are forms 
which the very names designate as definitions. As- 
sessable stockholders are often liable to creditors to the 
amount of the par value of their stock, while non- 
assessable shares carry all the privileges but no Ha- 



OUGHT TO KNOW 81 

bilities other than the possible loss of the original cost 
of the stock. 

"Cumulative stock is often worth while. Its feature 
of interest is that when dividends are not paid as 
promised they accrue as obligations before the com- 
mon stock can have an interest Crucible Steel pre- 
ferred and Corn Products Preferred are examples 
of securities of this nature which paid up back divi- 
dends. Non-cumulative stock improves the chances of 
subsequent shareholders. If a preferred stock is non- 
cumulative, the common stockholder has a better chance 
to participate in profits, if the business is ultimately 
a success. 

"Guaranteed stock is usually the stock of a company 
which is under the control of another, the latter guar- 
antees the payment of the dividends. The name sounds 
good but the guarantee is only as good as the sound- 
ness of the guarantor." 

Conclusion 

The astute and careful John K. King, poten- 
tial investor, studied these terms and definitions. 
What had he best do with that half million? 
The very first consideration was to forget the 
definitions and terms as the basis for investment. 

Because a bond is called "First Mortgage" 
does not stamp it as a good investment. Because 
a stock is "common" does not stamp it as a poor 
investment. Back in 1908 Mr. King could have 
purchased Iowa Central First Mortgage 4's at 



82 WHAT EVERY INVESTOR 

81 and refused Sears, Roebuck & Co. common 
stock at 40. In 1917 Iowa First 4's are selling 
at 45 and Sears, Roebuck common at 160. 

Never invest in a name. Invest in a security 
because it is good, no matter what its name 
may be. 



OUGHT TO KNOW 83 

CHAPTER VII 

How to Invest a Half Million 

An Investment in Each Form of Bond — The 
Formula to Follow 

A HALF Million Dollars to invest ! For a 
retired bridge builder like John K. King, 
this was as difficult a job as any of the 
problems he had ever met in business. He had 
studied the various forms of investments and 
learned all the well known forms of bond mort- 
gages and was no better off than before except 
in a general way. 

John K. had been a specialist in his own busi- 
ness. He realized that very few bankers and 
brokers would be able to build a cantilever bridge 
across the St. Lawrence, and his sound judg- 
ment followed out the analogy whereby the con- 
clusion was reached that very few bridge builders 
had enough training to invest a half million 
dollars. There are specialists in the bridge busi- 
ness as well as the investment business and John 
K. shrewdly appreciated the fact that most bank- 



84 WHAT EVERY INVESTOR 

ers and investment firms had something of their 
own that they desired to sell. This individual 
phase might be all right and it might be all 
wrong, so there was but one thing left and that 
was to get 

Disinterested Advice 

Every investor should know above all things 
that statistics and opinions are best when mixed 
by experts. The novice can miss the most im- 
portant feature of a report. Net earnings may 
look fine, but really misrepresent. The Science 
of Finance is just as difficult as the Science of 
Law, and yet nd one goes to court without ad- 
vice. John K. King collected all his data, col- 
lated all his advice, but, before he made the first 
step toward purchase, he consulted a disinterest- 
ed Analytical Bureau. It happened that the Spe- 
cial Analytical Service Bureau of The Magazine 
of Wall Street received the order. After the 
elimination of many suggestions, the securities 
of the accompanying table were chosen to meet 
his individual needs. He well knew that his list 
might not be satisfactory to the widow or the 
small investor. Each must solve his own prob- 
lem according to his individual conditions. 



OUGHT TO KNOW 85 

Bond Reports 

GUARANTEED BOND— Allegheny & West- 
ern first mortgage gold 4 per cent, bond, due 
Oct. 1, 1998. This railroad was chartered in 
1898 as a consolidation of various small com- 
panies near Pittsburgh, Pa. It is leased for the 
full term of corporate existence to the Buffalo, 
Rochester and Pittsburgh Ry. Co., which agrees 
to pay the principal and interest on the stock and 
bonds. It is a first lien on its road, equipment 
and future acquisitions, holds a very high invest- 
ment rating and has a market on the New York 
Stock Exchange. The road itself is an excellent 
property and the guarantor enjoys a further high 
rating as a railroad company. 

SECOND MORTGAGE BOND— United 
States Steel Co. sinking fund 5 per cent, bonds, 
due April, 1963. These bonds are as well known 
as any investment in the United States. The 
sinking fund may redeem them at 110 and in- 
terest some day and the bonds are a direct obli- 
gation of the company and secured by a lien on 
all the property subject only to the 50-year 5 per 
cent, bonds of 1951, known as the Carnegie 
bonds. The whole world knows the success of 



86 WHAT EVERY INVESTOR 

this most wonderful industrial company and 
there is a wide margin of safety in earnings for 
this issue. 

DEBENTURE BOND— General Electric Co. 
3-year 6 per cent, gold notes, due July 1, 1920. 
The General Electric Co. is in remarkably strong 
financial condition, and would be justified in 
paying out all surplus earnings in dividends. 
These bonds are a direct obligation of the com- 
pany but are not secured by mortgage. They 
are securities of unquestioned standing and pos- 
sess a high degree of safety. They were brought 
out by Lee, Higginson & Co., and J. P. Morgan & 
Co., and w r ere heavily oversubscribed. 

LAND MORTGAGE NOTES— Canadian Pa- 
cific Railway Co. 6 per cent. Note Certificates, 
due March 2, 1924, are a direct obligation of the 
company and secured upon a "Special Investment 
Fund/' composed of deferred payments on lands 
heretofore sold and securities in which the pro- 
ceeds of land sales have been invested aggregat- 
ing $55,000,000, and the outstanding amount is 
$52,000,000. These notes are backed by the 
credit of one of the greatest railroads in the 
world and the redeemable features and terms of 
the mortgage are very satisfactory to the lender. 



OUGHT TO KNOW 87 

FIRST MORTGAGE BOND— Wilson & Co. 
6 per cent, bonds are a first lien on the property 
of one of the largest packing companies in the 
world. In 1916 the profits available for interest 
on these bonds were over five times the require- 
ments and for the present year the earnings are 
running at the rate of about ten times the amount 
of required interest. The company is in capable 
managerial hands and the market for the bonds 
is firm and remains slightly above par. 

COLLATERAL TRUST BOND— American 
Telephone & Telegraph 5 per cents, are a new is- 
sue and are entitled to exceedingly favorable rat- 
ing. These bonds have passed above the offering 
price but have lately declined with the general 
market. They may be considered one of the 
most attractive investment bonds in the market. 
The security is above adverse criticism and they 
are backed by the greatest public utility company 
of its kind in the world and one of the best man- 
aged. There would have to be a revolution in the 
earnings' decline to effect this issue. 

GENERAL MORTGAGE BOND— The 
Reading Company and the Philadelphia and 
Reading Coal and Iron Co. 4 per cents., due Jan., 
1997, are given the very best investment rating. 



88 WHAT EVERY INVESTOR 

The mortgage is secured upon practically the 
entire property, including the valuable stocks of 
the coal property. There are a number of prior 
liens which cannot be renewed as mortgages 
when due so that this issue eventually becomes a 
first mortgage. Every time dividends are paid on 
the stock, provision is made to apportion an 
amount of tax on coal mined as a sinking fund 
for these bonds. No error can be made in this 
investment. 

IMPROVEMENT BOND— New York Cen- 
tral 4 per cent., Series A, due 2013. These 
bonds are secured by a mortgage on certain ex- 
tensions and improvements made by the New 
York Central Railroad, and are amply secured by 
a SO per cent, surplus valuation of the prop- 
erty itself. Their distinction lies in the fact 
that the New York Central is back of them and 
although there have been recent excessive de- 
creases in the earnings which has had an un- 
favorable effect on the stock, there is nothing to 
warrant a conjecture that the situation will ever 
be serious enough to affect these or other bonds 
of this road. This issue, while not of the first 
class, is one of the best of this form of mortgage. 

GOVERNMENT BOND— The Libery Loan 



OUGHT TO KNOW 89 

needs no comments. It is the best investment in 
the world. 

DOUBLE GUARANTEED BOND— North- 
ern Pacific-Great Northern Joint Guarantee of 
Chicago, Burlington & Quincy Collateral Trust 
4 per cent., due 1921. These bonds are to be 
considered as in all practical ways secure and 
entitled to the very highest investment rating. 
The two most prominent railroads not only guar- 
antee this issue, but the collateral is C, B. & Q. 
stock at $500 stock for every $1,000 bond. The 
mortgage contains many excellent other features 
to prevent impairment of this lien. Truly a. re- 
markable investment ! 

CONSOLIDATED MORTGAGE BOND— 
Pennsylvania Railroad Ay 2 per cent, bond, due 
Aug., 1960. These bonds are partially secured 
with other issues on 1,404 miles of road and ap- 
purtenances in Pennsylvania and 309 miles of 
leaseholds, real estate securities, etc., divided 
in various sections throughout the entire sys- 
tem. It is a second lien on some parts, a third 
lien on others and still a fourth lien on other sec- 
tions. In spite of the diversified character of 
the mortgage it is one of the strongest mortgages 
of the greatest of all railroad systems, as it is 



90 WHAT EVERY INVESTOR 

secured on the old main lines of the system and is 
protected by -the most valuable leasehold. Its 
rating is as high as can be given an investment. 

GUARANTEED LAND MORTGAGE— An 
investment in a guaranteed land or building 
mortgage of such prominent guarantors as the 
Lawyers Title Insurance and Trust Co. or the 
Title Guarantee & Trust Co., on a 5 per cent, 
net basis to the investor is perfectly safe. Care 
should always be taken to make a personal in- 
spection of the property itself, except where 
the mortgage is in participation with other in- 
vestors. In the latter event the investor banks on 
the integrity of the financial concern guarantee- 
ing the mortgage. 

SAVINGS ACCOUNTS up to the amount of 
$13,200 may safely be carried in five or six dif- 
ferent banks for this purpose and will provide 
ready cash for many contingencies, when such 
cash is needed. Of course in times of stress, the 
savings banks are not much better than securi- 
ties as to safety, but they provide a possibility for 
use of immediate funds when investments are 
down in price and therefore need not be sacri- 
ficed as the savings deposit cannot deteriorate. 



OUGHT TO KNOW 91 



The Stocks 



The following stock investments for John K. 
King were carefully selected by the Analytical 
Service. Space does not permit a review such as 
Mr. King received but for the purpose of illus- 
trating how every investor should go about se- 
lecting, a sentence or two is given. To follow 
John K.'s system of safety, the reader should 
pick out the salient points of the reasons when 
using them for his or her individual purposes. 

PREFERRED STOCK— Southern Railway 
Preferred is an issue which is more likely to 
come into its own after peace has been restored. 
Cessation of war will mean a resumption in 
traffic for many of the commodities and manu- 
factures which prior to the war found an ex- 
port outlet; particularly cotton and phosphate 
rock. The bulk of the South's cotton plants are 
located along the lines of the Southern Railway 
system and it needs but little reflection to see to 
what extent traffic on this system will be revived 
when export of cotton and phosphate is re-es- 
tablished. 

Earnings of the Southern Railway system 
are running currently at a rate equal to about 



92 WHAT EVERY INVESTOR 

20 per cent, of the preferred stock and 7y 2 per 
cent, on the common stock, these rates compar- 
ing with 15.56 per cent, and 5.28 per cent, re- 
spectively in 1916. 

PREFERRED STOCK— Cities Service Pre- 
ferred is a conservative investment and we 
should recommend that you buy it inasmuch as 
you are primarily interested in the income of the 
stock. There is no reasonable doubt as to the ul- 
timate safety of principal and income on this is- 
sue. The dividend is now protected by a large 
margin of earnings and there are very strong 
equities back of the issue. The price may go 
lower because of the investment conditions which 
favor higher yields on securities having a fixed 
rate of income. But you may buy your Cities 
Service Preferred without uneasiness as to its 
ultimate position, as it should eventually be es- 
tablished at a level materially above its current 
quotation. 

PREFERRED STOCK— Kansas City South- 
ern Preferred, paying 4 per cent, annually, yields 
on present price 8 per cent. The rate has been 
maintained for nine years, and with the road in 
a flourishing condition there is no prospect of 
this return being reduced. The stock has indi- 



OUGHT TO KNOW 



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94 WHAT EVERY INVESTOR 

cated earning power of 13.68 per cent, for the 
current fiscal year based on the returns to July 
31, 1917, against 9.63 per cent, for 1916. Oper- 
ating income and gross revenues show similar 
large increases over preceding years, while ex- 
penditures show no such ratio of increase con- 
sidering the abnormal times and the high cost of 
materials and labor. We are impressed with the 
showing of this road for the past few years, and 
it seems as if the rehabilitation program begun 
in 1906 and costing something over $16,000,000 
has been completed and placed the road on a 
standard base throughout. 

PREFERRED STOCK— American Sugar Co. 
Preferred stock should retain its investment 
value during all time. While it is true that the 
common stock need now be regarded as a war 
stock and is subject to serious speculative fluctu- 
ations, yet there is little possibility of the com- 
pany's business ever being affected to the extent 
of impairing the 7 per cent, paid on the senior 
issue. The American Sugar Refining Co. owns 
a majority of the capital stock of the Iowa Sugar 
Company, one-half of the capital stock of the 
Spreckels Sugar Company and minority interests 
in the stock of the Alameda Sugar Company, the 



OUGHT TO KNOW 95 

Continental Sugar Company, the Great Western 
Sugar Company and the Michigan Sugar Com- 
pany. Of these the Great Western Sugar Com- 
pany has made the best showing by far. It is 
predicted that for the year 1917 in addition to 
the regular dividend of 1% P er cent, on the com- 
mon stock this company will pay extra dividends 
aggregating $40 per share. 

PREFERRED STOCK — Bethlehem Steel 
New Preferred 8 per cent, stock is way out of 
line — it's one of the cheapest stocks on the list 
and when a few more people get afraid of it, 
it will be time to load up. It was publicly 
offered as high as 106, and now the stock walks 
the street with no place to go at 94. Off in 
the background is the 7 per cent, preferred, tick- 
eted at around 88 and yielding only 7.85, as com- 
pared with the newcomer's return of more than 
8.50. The new 8. per cent, preferred is not only 
prior to the 7 per cent, issue as the 8 per 
cent, issue alone is cumulative but has a call on 
the common B stock at 115. It has back of it 
something like $500 assets per share and aver- 
age earnings from 1912-1916 of $104 a share. 
It may go lower, but you will want to tell your 
children how low you bought it and to be sure 



96 WHAT EVERY INVESTOR 

you have a good story, buy it down and buy it 
on the way back. 

COMMON STOCK— Consolidated Gas, Elec- 
tric Light & Power of Baltimore may be regarded 
as a pretty good investment at around present 
prices. The action of this company in reducing 
the price of electricity and at the same time in- 
creasing the dividend rate from 7 to 8 per cent, 
annually reflects the strong financial position the 
company is in. Earnings are expected to show 
a continued increase in the near future, inas- 
much as the company has not yet begun to re- 
ceive the full benefits from its big manufactur- 
ing developments in the Baltimore City district. 

COMMON STOCK, National Biscuit Co.— 
This company has been, of course, tremendously 
handicapped in the last year or two by the greatly 
increased cost of raw materials entering into the 
manufacture of biscuits. Peace should mean 
lower prices for such essential products as lard, 
flour, etc. We regard the stock as a peace stock 
and it may be purchased now by an investor 
who is willing to hold it until a return to normal 
conditions. The company is a magnificently man- 
aged concern and it is so well fortified financially 
that it could easily afford to pay dividends out 



OUGHT TO KNOW 97 

of surplus for some time even if it did not earn 
them. The price has been very low on account 
of unfavorable conditions and liquidation after 
the death of the former president. It is very 
much of an investment bargain at present. 

COMMON STOCK— National Enameling & 
Stamping is most attractive from a semi-invest- 
ment viewpoint, both because of its compara- 
tively low selling price and because of the favor- 
able prospects for an increase in the dividend rate 
or the payment of extra dividends. National 
Enameling & Stamping's recent expansion has 
been of a very substantial character and earnings 
of the company show a wide margin over divi- 
dend requirements. The company is now earning 
at the rate of between $30 and $40 a share per 
annum compared with $11 a share actually 
earned in 1916. Dividends were recently re- 
sumed at the rate of $4 a share per annum. On 
the basis of present earnings and dividend pay- 
ments there is a wide leeway for an increase in 
the dividend or the payment of extra dividends, 
but the effect of Government taxation of excess 
profits must be taken into consideration in this 
connection. 

COMMON STOCK— Woolworth is showing 



98 WHAT EVERY INVESTOR 

steady increases in business and as an investment 
is always to be considered fairly secure. How- 
ever, there are many uncertainties in the pres- 
ent situation and while the technical position of 
the market has been greatly improved in anticipa- 
tion of the new offering of Liberty Bonds, we 
expect to see temporary reactions accompanying 
the present rally. You will assume little risk in 
buying Woolworth, but we think it quite possible 
that by adopting a waiting attitude you will be 
able to secure the stock somewhat cheaper. How- 
ever, inasmuch as you are investing a half mil- 
lion in funds and intend to hold the investments 
indefinitely, you would not assume any serious 
risk in making your purchase at the present time. 
While the stock is acceptable for you it might 
not be as acceptable for another in a less happy 
financial position than yourself. 

COMMON STOCK— Southern Pacific stock, 
paying 6 per cent., appears at present levels to 
be comparatively low in price. In 1910, for 
example, when 12.3 per cent, was earned on the 
stock, it sold up to 138% and did not go below 
103%. In 1911 it did not sell under 104% and 
in 1912 under 103%. Yet earnings at the present 
time are far ahead of the earnings in the years 



OUGHT TO KNOW 99- 

mentioned. The explanation is due, in the first 
place, to the fact that railroad stocks were in 
much more favor in those years than they are at 
the present time, and, in the second place, to 
the fact that the war has caused the selling of 
railroad stocks held abroad. 

Southern Pacific stock would appear to be sell- 
ing at a lower price than it is intrinsically worth 
and can be regarded as an attractive long pull in- 
vestment. Its 6 per cent, dividend looks very 
secure. 

COMMON STOCK— Northern Pacific is a 
very sound investment stock and you are justified 
in holding it for an investment. In spite of 
highly increased operating, and maintenance 
costs, under which all the railroads have been 
laboring, Northern Pacific has returned an oper- 
ating income of $14,201,694 for the first six 
months of the current year as against $12,959,- 
380 for the corresponding period of 1916. The 
company operates through a very rich territory 
and according to latest reports is showing con- 
tinued improvement. The stock may go lower in 
sympathy with the general weakness in the mar- 
ket, but the road is in a strong position and we 



100 



WHAT EVERY INVESTOR 



feel sure that you will be ultimately able to value 
it at a considerably higher price. 

John K. King's analytical reports covered two, 
three or four letter pages for each security, but 
only the bare summary has been used here for 
illustration. Mr. King learned to pick out the 
facts and apply them to his individual case such 
as each investor must learn to do. Throughout 
all the research work, John K. King noted that 
this formula was observed : 

Safety of Principal 
Wide Geographic Distribution 
Wide Industry Distribution 
Income A 

Stability of Price f Real 

Marketability Investment 

Desirable Future 
Distribution of Classes of Credit 
(Bonds) or Partnership (Stock). 



OUGHT TO KNOW 101 

CHAPTER VIII 

The Stock Selling Circular 

What Constitutes an Investment — How to 
Escape the Pitfalls of the Prospectus 

"T Tf TILL you please give me a letter of intro- 
y y ductidn?" a young man asked Mark 
Twain some years ago. 

"But I do not know you; I have never seen 
you before," replied the great man. Nevertheless 
the young man pleaded and urged his case until 
Mark sat down and wrote him the following let- 
ter: 

"To whom it may concern: I know nothing 
about the young man who offers you this letter, 
but I admire his nerve. " 

This is a letter of introduction of the brokerage 
or investment firm which sends you a letter 
about a speculation and terms it an investment. 

As you read this article thousands of Ameri- 
can citizens are opening their mail and reading 
the story of, the "most wonderful investment ever 



102 WHAT EVERY INVESTOR 

offered to the public." The circular is printed in 
two or three colors with artistic typography and 
alluring illustrations. It is written by a master 
of the English language and it cannot fail to 
attract the attention of the average business man 
or woman. But if you are the one who has en- 
joyed the reading of this interesting offer of the 
well-known investment firm of Jones & Smith, 
just put it aside for a moment and ask yourself 
this question: 

"Is this an investment ?" 

You know that you cannot afford to speculate. 
You have labored too hard and long for that 
surplus to lose it in a few days or weeks and 
you desire to invest. Therefore, it is necessary 
that you conserve this hard earned surplus and 
take no chances with it. 

You wish to invest. Are you sure that this 
blatant prospectus is an investment? Do you 
know what an investment is ? 

What Is an Investment? 

Readers will recall Beriah Sellers' Infallible 
Imperial Oriental Optic Liniment and Salvation 
for Sore Eyes — small bottles fifty cents, large 



OUGHT TO KNOW 103 

, ones a dollar. Average cost, five and seven cents 
for the two sizes. Capital needed to manufacture 
the first two thousand bottles, only one hundred 
and fifty dollars. There are millions of people 
in the world. Everyone will need a bottle, for 
nearly everybody has ophthalmia. There's mil- 
lions in it! Even the schoolboy recognizes that 
Col. Sellers' scheme is not an investment. 

Oils and mining stock ventures offer the great- 
est inducement for stock promotions. It is there- 
fore among this class of offerings that the great- 
est danger to the public lies. Before the min- 
ister, the small retailer, the farmer or the widow 
answers the advertisement received in the mail, it 
is very necessary to repeat the following sen- 
tences : 

"The distinguishing characteristic of a specu- 
lation is the fact that its value depends upon 
circumstances which cannot be known because 
the future is needed to reveal them. An in- 
vestment, on the other hand, contains no 'ifs' or 
'provideds' or 'reasonable certainties.' Its value 
is founded upon certainty. A speculation is 
founded upon shifting sands of probability and 
supposition." (Meade.) 

Also read over the following questions which 



104 WHAT EVERY INVESTOR 

appeared in an editorial of the Wall Street Jour- 
nal seventeen years ago and apply them : 

1. What were the plants able to earn on the 
average for the five years preceding the combi- 
nation ? 

2. What would this amount have paid on the 
present amount of stock? 

3. How much have expenses been reduced by 
consolidation ? 

4. What will the combination have to earn net 
to pay 7 per cent, on its preferred stock? 

5. How much in excess of that amount is the 
company earning now? 

6. What is the amount of its net floating debt? 

7. How is the floating debt secured? 

8. Is the corporation hampered by burdensome 
contracts ? 

9. Can it enforce its own contracts with buy- 
ers? 

10. What is the extent of the competition en- 
countered ? 

11. What is the possibility of reducing operat- 
ing expenses? 

12. Is the management in every way compe- 
tent and satisfactory? 

Now, if you are not accustomed to the study 



OUGHT TO KNOW 105 

of investments you will perhaps say, "What good 
will it do me to ask all these questions, for when 
I find out the answers I shall not know much 
more than I did before ?" 

The fact of the matter is that unless you are 
able to understand these questions and answers, 
you have no right to invest your money and you 
should be careful never to be guided alone by the 
circular or prospectus of any investment or 
brokerage firm. And if you have surplus funds, 
you are not true to yourself or your dependents 
unless you do learn what an investment is and 
educate yourself in all matters financial, even 
though this education is elementary. 

The Business of Investing 

Let us suppose that Mrs. Jones lives in Keo- 
kuk. Her husband, who was a druggist, accu- 
mulated a moderate fortune of ten thousand dol- 
lars. He died, leaving his widow with one child 
about ten years of age, and all his accumulated 
fortune went to his widow. 

Even though Mrs. Jones had neglected an ele- 
mentary financial education, she knew enough 
to refrain from going into the shoe business on 
Main street of Keokuk. She did not know any- 



106 



WHAT EVERY INVESTOR 




OUGHT TO KNOW 107 

thing about the shoe business and would not 
jeopardize her capital, for she knew of no means 
of getting it back if lost. 

But there are thousands of Mrs. Joneses all 
over this country who are willing to "invest" 
their capital in the Acme Oil Co. or the Bonanza 
Mining Co. simply because some broker ( ?) 
sends them an attractive circular. 

And the Business of Investing is a thousand 
times more difficult to learn than the business of 
selling shoes. 

In the former articles of this series the writer 
has endeavored to show what an investment 
really is and how the novice should go about 
investigating and learning. The suggestions have 
been elementary because it is necessary to lay 
the ground work of first principles. It is this 
same phase of education which the incipient in- 
vestor must absorb before he or she risks one 
dollar. 

Educated men, even in the ministry and law, 
will study the theory of economics, will dig into 
the intricacies of bi-metallism and the study of 
the gold reserve, but will "fall" for the first 
attractive circular of a new oil venture without 
knowing one thing about it. Reader, do not 



108 WHAT EVERY INVESTOR 

imagine that you are above this class of citizen. 
Unless you know the elementary psychology 
of the fake stock promoter, you are not insured 
against loss. 

The Safety of Principal 

No real investor will buy a security whose 
value is in any way doubtful. The stock or 
bond of stable value is the only kipd that inter- 
ests him. He wants to feel that the principal is 
reasonably safe and that, barring market fluctua- 
tions or world wars, he may sell it without loss 
in the event of necessity. If he is satisfied with 
the safety of his principal, he will sacrifice a 
large return in interest. 

The interest return, however, must be based 
on the condition of the times. Back in 1902 
anything over Ay 2 per cent, was thought to be 
on the verge of speculation, but today different 
conditions prevail and in 1917 there are excel- 
lent investments yielding from 6 to 8 per cent. 
Therefore, the rate of interest cannot be taken 
as a criterion to differentiate between an invest- 
ment and a speculation. 

The big financial institutions, insurance com- 
panies, banks and trust companies are the big 



OUGHT TO KNOW 109 

investors of this country. Executors and trus- 
tees, the fiduciaries who hold funds for others, 
are also big investors. These big investors de- 
mand safety before any other consideration. That 
must be your first thought in making an invest- 
ment — Safety ! 

The Psychological Appeal 

It is true that we have steadily been educating 
ourselves in financial matters, but the prevailing 
psychology to induce an investor to buy stock 
in a speculation is the same today as it was in 
1902, when Edward Sherwood Meade, Ph.D., 
wrote : 

"Here are the principal inducements offered to 
the speculator in every new enterprise : 

"Other men have made money in similar enter- 
prises. Why should not he be equally fortunate? 
He is not asked to gamble, but merely to in- 
vestigate an industrial opportunity and act as his 
judgment directs. He is carried away by the 
prevailing optimism of the time, and he is ready 
to listen* to the advocates of new schemes for 
getting rich. Other people are making money 
fast, and he is certain of his ability to do as 
well as they. The appeal to his 'judgment' and 



110 WHAT EVERY INVESTOR 

his 'courage' is the bit of flattery which is often 
decisive, and the final outcome is that the man 
of small means 'invests' $100, $200 or $5,000 in 
the stock of a new company in the confident ex- 
pectation that from this small investment he will 
one day reap a fortune." 

The chances are that the harvest will be a 
ream of worthless or near-worthless stock cer- 
tificates. 

Speculator or Investor? 

This series of articles is for the investor. The 
speculator has his individual field and he is a 
great asset to any young country. It is a doubt- 
ful question which is the more beneficial to a 
growing country, the speculator or the investor. 
But speculation is even a greater science than in- 
vestment and must be left to the professional. 
Every man with a surplus dollar should be an 
investor, but the speculator is a specialist. His 
gains are rightly large because his losses are in 
proportion. The speculator must be in a posi- 
tion where he can afford to lose; the small in- 
vestor is never in that position. 

It has been argued that it is beneficial to a 
country to have speculative experiments tried at 



OUGHT TO KNOW 111 

the expense of the venturesome. This argument 
may or may not be right, but the investor can 
readily see that the only way it should affect him 
rs to evolve an investment from what was orig- 
inally a venturesome speculation. 

Continuous Supervision 

There is another well-known psychological 
phase about the investor which demands com- 
ment. Once an investment is made the investor 
is apt to forget about it. 

Outside of having his holdings periodically ex- 
amined and judged, there is much that every in- 
vestor ought to know to help himself. Here are 
a few of the suggestions : 

1. If a stock, have it transferred to your name, 
or, if a bond, at least have the principal regis- 
tered in your name. If this is done, you will 
be the recipient of all notices from the company 
and will be able to study developments. You will 
receive proxies for voting, reports of earnings, 
notices of special meetings, certificates represent- 
ing valuable "rights" if issued, and you will un- 
consciously compare your company with its com- 
petitors. 

2. Read the quotations of the sales of your 



112 WHAT EVERY INVESTOR 

investments as often as they are shown in the 
newspapers or financial publications. The fact 
that a big change suddenly occurs either up or 
down in your investment means something which 
is likely to affect its value. It is time for you 
to get after the facts at once. Many New Haven 
Railroad investors never noticed the drop in price 
of their stock until the loss had become serious. 
3. When you are mentally satisfied that you 
have made an honest mistake in judgment in an 
investment, do not deceive yourself into thinking 
it "may come out all right some day." This 
plan of reasoning is much like the man who plays 
solitaire and cheats himself to make the cards 
come out right. Switch into something else and 
the chances are you will be right the second time, 
for the lesson of the first will have been a 
liberal education. 

Conclusion 

Whether you are rich or poor, if you are an 
investor or need to be an investor, educate your- 
self before making the first step. 

Do not be deceived by the prospectus or circu- 
lar of a new promotion. Learn to develop the 
character of a professional buyer and you will 



OUGHT TO KNOW 113 

be able to meet the Svengali hypnotism of the 
stock salesman who offers a speculation. 

Learn what an investment really is. Ask the 
questions which have been outlined in this article 
and as many more as you can think of and be 
able to understand the answers to these questions 
and to pick the flaws in the salesman's reasoning, 
if there are flaws. 

Do not become a speculator when you are by 
habit and position an investor. 

Keep constant track of your investments. 



114 WHAT EVERY INVESTOR 

CHAPTER IX 

Tricks of the Unreliable Broker 

New Promotions — Ventures Which Are Not 
Investments — How to Investigate 

WE stopped and looked at our stockhold- 
ers, some surprised. It wasn't quite the 
kind of a gang we supposed had been 
investing. They all looked like poor people; 
there were plenty of old women and lots of young 
girls that you'd say worked in factories and 
mills. Some were old men that looked like war 
veterans, and some were crippled, and a good 
many were just kids — bootblacks and newsboys 
and messengers. Some were working men in 
overalls, with their sleeves rolled up. Not one 
of the gang looked like a stockholder in anything 
unless it was a peanut stand. But they all had 
Golconda stock and looked as sick as you please." 
Such is O. Henry's description of the investors in 
a fake mining scheme, from "The Gentle Graft- 



OUGHT TO KNOW 115 

er." It is amusing fiction, but is it so much 
different from the real thing? 

A Pitiable Letter 

The following is a letter from a woman who 
did not have very much to lose. If she lost her 
little capital, she had no means of replacing it. 
She is an investor. She is living today and her 
letter is typical of thousands of others. 

"Dear Sirs : Messrs. & Co., Street, 

did me a very dirty trick. They roped me into buy- 
ing 5,700 shares of at 1 9/16 on a margin. 

I saw they did not buy or hold the stock but just kept 
my money, and as they said I had nothing for my 
money but the interest of the stock and them for my 
cash. I paid up the margin and asked for my stock 

also 100 shares stock May 16th, but week 

after week they would not send me my stocks. 

"Then Mr. came here, 164 miles, to see me 

and told me my stock was going away 

down and he advised me to change it at even 

and take , a stock that they give you in 

two minutes after they force you into buying it. They 
forced me into buying 3,000 shares one day before I 
got out of their office and made me pay cash. Now 

they say I sold my and gave Mr. orders 

to buy and have kept my stock and sent me 

stock and will not do anything. I sent 

a telegram same day saying, 'Do not sell my 

stock'; for I knew when they told you about a 



116 WHAT EVERY INVESTOR 

stock they would say they bought 3,000 or more thou- 
sand shares and make you take it on margin. 

"My stock they would not deliver un- 
til they got the rights and kept them. The rights were 
worth $540, but they won't do a thing. I now hold 
8,700 shares and they kept my 



stock. What would you advise me to do? Can 

I sell the — or is it a real thing or a bunko ? 

I did not tell them to sell my stock and 

above all to buy 5,700 shares for I hated 

the 3,000 shares I had. 

"Kindly advise me and oblige/' 

The summary of the advice is : First, do not 
attempt to invest until you know what an invest- 
ment is and then get the opinion of experts 
before taking the first steps. 

Second, read and educate yourself so that you 
can invest intelligently. 

Third, do not become the cats-paw for brokers 
who are not brokers but probably "fly-by-nights." 

Fourth, in this particular case, complain to 
the police department. Also get an attorney. 

Until we become a country of investors, until 
we establish schools showing how to invest and 
how to protect what has been earned by the 
sweat of the brow so that it will not land in 
the bank accounts of the thieves, we have not 
conserved our resources. Public schools train 



OUGHT TO KNOW 117 

boys and girls in the methods of business — how 
to make money. Where is there a course on 
how to keep it? 

How They Do It 

The campaign of a few years back by the 
larger exchanges to get rid of "bucket shops" 
was the real beginning of the end for the 
crooked broker. From that point on, the fakers 
reorganized their various schemes and estab- 
lished offices which "apparently" did a legitimate 
business. If one of these firms did not have 
sufficient capital, the process of doing business 
was somewhat as follows, of course with varia- 
tions depending on circumstances: 

An out of town retail grocer notices in the 
daily paper that the oil stocks are booming and 
he reads tales of large sums having been made 
by insiders and even by just ordinary people. 
He has no brokerage connections and the 
thought enters his mind that he should profit as 
well as others. His home town, or city, news- 
paper contains the advertisement of Smith & Co., 
who tell of the merits of some prominent oil 
stock now being traded in on the "Curb." Cor- 
respondence follows and our grocer friend is per- 



118 



WHAT EVERY INVESTOR 




OUGHT TO KNOW 119 

suaded to "take a flyer." He thinks that he is 
"investing." 

A check for $1,000, which should have been 
invested in good 5 or 6 per cent, baby bonds, 
or in a good preferred stock, is sent with the 
order to purchase the oil stock. Smith & Co. 
send back a report that the stock has been pur- 
chased and proper entries are made on their 
books. If the stock goes down, actual purchase 
is made, and not until then, but purchase is not 
made at the time the order goes in. If the stock 
goes up, Smith & Co. take advantage of the 
grocer's ignorance and suggest that he switch his 
"investment" to another stock, usually oil or min- 
ing. This second stock is of a type which 
the firm has bought up by the ream and there is 
plenty of paper printed to look like real certifi- 
cates. If the grocer does not desire to make 
this switch, a representative of the firm, whose 
personality is of the persuasive kind, takes a trip 
out to the country town or city to see his pros- 
pect. The very fact that a representative of the 
firm takes the trouble to make this trip, tickles 
the vanity of our grocer-investor and it is a sim- 
ple matter to persuade him. Thus, the firm of 
Smith & Co. have been able to distribute a worth- 



120 WHAT EVERY INVESTOR 

less security through the brokerage on a real 
security. 

Women the Prospects? 

Investment education is only beginning. The 
last Liberty Loan did much and the one to come 
will do much more toward this education, but, 
in the mean time, the best prospects for the 
"fly-by-night" concerns are women. The appeal 
of advertising literature is such that women have 
more time to take cognizance of it. To many of 
them investment appeals as a broader field in the 
business of life, and they are eager to learn and 
readier than the average man to take a chance. 

Up to the present time, the women who have 
entered the brokerage and investment business as 
a profession have been of the highest type and 
they desire only to protect their own sex. But 
the oily salesman of undesirable character still 
exerts his energy among women with money and 
it is unfortunate that he is able to succeed so 
well. 

It is difficult for the woman with a husband 
to attempt the management of her own financial 
affairs, because the man usually feels that all 
such matters are a part of his business and his 



OUGHT TO KNOW 121 

wife should not attempt to interfere. The time 
is coming when the investment of family funds 
will be discussed in family conference. 

In the meantime, no woman should attempt in- 
vestment or become connected with any broker- 
age firm in a business way, until she has first in- 
vestigated the standing of the firm in question. 
Furthermore, whenever an order has been placed 
for the purchase of securities the customer should 
arrange for the delivery of the actual certificates 
at once. If the firm makes excuses which are 
unreasonable on their very face, the matter 
should be placed in legal or post-office hands 
without delay. 

The Stability of Investments 

Thousands upon thousands of good solid citi- 
zens think of oil and mining stocks as invest- 
ments similar to railroad and industrial bonds 
and stocks. It is certainly true that wealth 
from the soil should be classed in this category, 
but the fact remains that very few of the oil 
and mining securities compare with rails and 
industrials in the matter of stability. Standard 
Oil securities, Anaconda Copper, and others of 
like character are in the minds of prospective in- 



122 WHAT EVERY INVESTOR 

vestors. The illustration of United Verde Ex- 
tension selling from- 40 cents a share to $40 a 
share is the incentive for others. Not so very 
long ago, the whole country was deluged with 
advertisements about a new candy business. 
These circulars pointed out the attractiveness 
of a business like Huyler's. The whole structure 
fell to the ground. Men of prominence who in- 
advertently lent their names suffered in conse- 
quence. 

Years ago investors listened to William Pater- 
son, whose Darien scheme was a gigantic swin- 
dle. French kings and premiers feted John 
Law, whose Mississippi Bubble burst with awful 
violence. All England listened to Sir John Blunt, 
whose South Sea Bubble wrecked thousands of 
fortunes and reputations and it is not so long 
ago that John Keely invented the Keely Motor 
in this country and investors from Europe came 
to praise it. 

Back in 1906 private cars of seasoned finan- 
ciers could be seen rushing to Goldfield. Soon 
after Goldfield Daisy and Goldfield Consolidated 
were actively traded in on the New York Curb, 
while the San Francisco Stock Exchange had 
as many mining stocks listed on it as the London 



OUGHT TO KNOW 123 

Exchange had world wide issues. Many of the 
attractive certificates today either line the strong 
boxes of "investors" never to be disturbed, or 
they have been sold at Yz cent a pound to be 
converted into paper for commercial purposes. 

Back in 1910 the waiter was in Los Angeles, 
the new oil district. Every newsboy and ribbon 
counter clerk had a sheaf of oil certificates tucked 
away in the hope of sudden riches. The climax 
came as usual and as it always will. Most of 
the enterprises were fake ones and were con- 
ducted by irresponsible firms. It was difficult to 
discern what was really bona fide. 

Many newspapers and financial publications 
are eliminating this class of irresponsible adver- 
tising from their pages. It is true that the begin- 
ning is small and there is much to be done. But 
the fact that there is a beginning means some- 
thing better for the big army of future investors. 

A short time ago, the editor of a newspaper re- 
ceived a special delivery letter from a "broker- 
age firm" in New York City. The letter was 
received just before going to press and con- 
tained the advertisement of a new oil company. 
"Take this advertisement at your own rates" was 
the message. It would not have been surprising 



124 WHAT EVERY INVESTOR 

if the country editor, not knowing financial con- 
ditions, had accepted it. If he had printed it, 
someone in that little town, calling himself an 
investor, would probably have lost hard earned 
savings. 

While you are reading this article, certain so- 
called brokerage firms have representatives 
throughout the United States selling securities 
of new automobile ventures. The salesmen are 
well dressed, appear affluent' and are wonderful 
"talkers. " No one knows how much money "in- 
vestors" will throw into the coffers of these auto 
companies which may never be more than incor- 
porations in the records of the state. 

An Illustration 

Here is an example of a mining scheme back 
in the early seventies and the analogy holds good 
to-day : 

Mr. A. — , a gentleman having some connec- 
tion with the mining interests of the country, and 
owning a claim which had been staked out on 
some auriferous ledge in Colorado, being natu- 
rally desirous of disposing of his property to ad- 
vantage, would go to some "prominent banker" 
for the purpose of negotiating a sale. But "prom- 



OUGHT TO KNOW 125 

inent bankers" are not in the habit of paying 
cash for property two thousand miles away. Ac- 
cordingly a proposition would be taken up to 
make the claim the basis of a stock company, 
and that the owner convey his property in it to 
the company and receive therefor a certain sum 
in cash, say $10,000, to be paid out of the first 
subscriptions, and also a certain number of shares 
of the stock. 

The capital might be two million dollars, rep- 
resented by shares of $50 each or 40,000 in all. 
An assay is made and literature sent out. Some 
wealthy merchant or some prominent man lends 
his name and the directors are also "made promi- 
nent" if they are not already so. Usually these 
"big" names get the stock at $12.50 when it is 
offered to the public at $25. 

Officers and a name are selected. The pros- 
pectus in excellent topographical detail is dis- 
tributed and the "investors" have a chance to 
subscribe before Nov. 10, after which date the 
books close and "the opportunity is gone for 
ever." Needless to say the stock is sold, and 
after a fitful spell of manipulation, the company, 
name and officers drift into oblivion. Of course 
the actual claim exists. But that is all. 



126 WHAT EVERY INVESTOR 

Conclusion 

The former chapters in this series have en- 
deavored to point out the salient points of an 
investment. This chapter points out one of the 
nasty features of brokerage which is not invest- 
ment and never will be investment. 

Readers may wonder why the chapter in ques- 
tion appears in "What Every Investor Ought 
to Know." No one's intelligence need be insulted 
when the big estates of the most prominent 
financiers we have known contain reams of 
"cats and dogs." Beware of the insidious stock 
salesman and the irresponsible brokerage firm. 

Before answering an advertisement apply for 
information to a responsible source of informa- 
tion. 



OUGHT TO KNOW 127 



CHAPTER X 

Record Your Wealth 

Transfer Stock to Your Name — Rent a Safe 
Deposit Vault — Some Pertinent Examples 

THERE are hundreds of dangers for the 
man or woman who owns any kind of 
wealth. The investor must learn first of 
all how to gain money, then he must study twice 
as hard to learn how to keep his capital intact, 
and finally he must observe every known rule 
to know how to protect the certificates which 
represent his wealth. 

There are three elementary methods of pro- 
tecting a bond or stock certificate. The first — 
and riskiest — method is to keep it about one's 
person or home; the second is to permit the 
banker or broker to hold it; and the third is to 
use a safe deposit vault. This article with its 
various illustrations has reference to the two 
last, and common sense, methods. 



128 WHAT EVERY INVESTOR 

Case i. The Negligent Man 

Mr. George Brown of Chicago invested $200,- 
000 through his bank and had the securities 
shipped to the bank on draft. The bank officials 
were not well informed as to the authenticity of 
these evidences of wealth, and, in Mr. Brown's 
presence, placed the securities in his vault. At 
his death five years later, the administrators 
of his estate found that $10,000 of the bonds 
were registered as to principal and had never 
been released. The original owner had died. It 
took many months and much money to make 
these bonds salable. 



Case 2. Neglect to Transfer 

Mr. Jacob Crowley of New York City pur- 
chased 50,000 shares of Rex Mining stock. He 
was "taking a flyer" ; the company was a pros- 
pect and there was no indication of any such 
pleasurable features as dividends. At no time 
was there ever a thought of a reason for trans- 
ferring these shares. Mr. C. gathered his roll 
of certificates, failed to examine them and dug 
out a resting place in his safe. He had pur- 



OUGHT TO KNOW 129 

chased the stock at 40 cents a share and was 
holding it for 80 cents. 

On the 24th day of March the directors of 
Rex declared that all stockholders of March 31 
whose names were on the company's books would 
have the privilege of subscribing for 10 shares 
of new stock for every hundred shares shown 
to be owned on the books. The subscription 
price was 30 cents. The stock was then selling 
for 50 cents. Mr. C. could buy 5,000 shares 
at 30 cents and sell for 50 cents. A profit of 
$1,000. Inasmuch as Mr. Crowley's name was 
not on the books of the company, he did not 
hear of this windfall. Some one else got that 
privilege. It was never claimed and the $1,000 
was lost forever. 

Case 3. The Lost Dividend 

Back in 1907 the Southern Pacific Co. had 
preferred shares. Mr. Walter Green, a broker, 
held 100 shares. There was a demand by the 
"odd lot" firms to borrow this stock against sales 
for which the actual stock was not at hand. Mr. 
Green loaned his stock. Later he called it in and 
received another certificate in another name. He 



130 WHAT EVERY INVESTOR 

immediately transferred the new certificate to 
his own name. 

When the company paid its final dividend Mr. 
Green received a check covering 200 shares. 
The borrower, or the buyer to whom the bor- 
rower had delivered the first 100 shares, had 
never transferred the stock. Ten years later Mr. 
Green still retained the extra dividend and there 
was no hope of ever tracing it to Mr. Green. 
Some careless man or firm had neglected the 
transfer. 

Case 4. Neglect to Keep a Record 

A wealthy Mrs. Ward, residing on Riverside 
•Drive, New York City, kept her securities in a 
safe deposit vault. She, however, kept no rec- 
ord of what was in the vault. About the first 
of the month, she opened her security box to clip 
some coupons, and after finishing the clipping, 
replaced the bonds and stock. She wore a rather 
long veil and the folds caught and held out a 
one thousand dollar Anglo-French 5 per cent, 
bond which is very much smaller in size than 
is -customary. Unknown to her the veil carried 
this bond out of the office and as she stepped to 



OUGHT TO KNOW 131 

the pavement, a gust of wind blew it to the street 
where it was soon churned into an unrecognizable 
mass. She never knew the number of the bond; 
it was not registered, and all she could know 
was that she had purchased the bond, but could 
never trace its disappearance. 

Needless to say Mrs. Ward ever after kept a 
full record of what she owned including a de- 
scription. 

Case 5. He Left Securities with the Broker 

Mr. Henry Leroy of New Rochelle, N. Y., was 
a wealthy man but was accustomed to increase 
his wealth by a series of speculations through 
a well known brokerage firm. Mr. Leroy was 
not an habitual trader, so that often, after a 
"campaign," he left a credit of both money and 
securities — in negotiable form — with his broker. 

Now all good and reliable brokers make it a 
strict custom to set aside the securities of cus- 
tomers which are paid for in full and left for 
safe keeping, or for margin when needed. These 
"good" brokers place such securities in an envel- 
ope marked as the "Property of Henry Leroy" 
and on the statements rendered they are listed, 



132 WHAT EVERY INVESTOR 

"Held for safe-keeping." But Mr. Leroy's 
brokers were not of this "good" type. Mr. L. 
did not insist upon this method of business, so 
that when X, Y, Z & Co. failed, it was discov- 
ered that Henry Leroy's securities had been used 
by the firm and were thoroughly tangled up with 
the disaster. It was a costly lesson but thou- 
sands of other careless investors have suffered 
and will suffer in the same manner. 

Case 6. 5000 Shares of Nipissing Mines 

A prominent merchant in the tobacco business 
with headquarters in New York City presented 
5,000 shares of Nipissing mines to the cashier of 
a brokerage firm in New York City a few years 
ago. In all there were 100 certificates ranging 
from 5 shares to 100 shares. 

This investor had not transferred the stock 
and had neglected to collect two dividends 
amounting to about $1 per share in all. The 
cashier began the search, getting the addresses 
from the company's books. After .ten months' 
work, he collected $4,200 of the $5,000 due and 
the cost of collecting in postage, time and fees 
amounted to $100. The loss was about $900. 



OUGHT TO KNOW 133 

There was absolutely no excuse for such negli- 
gence. 

Case 7. What Happens to a Non-Dividend 
Payer 

Mr. Edward Dayton of Salt Lake City owned 
100 shares of Wabash Railroad stock (common). 
Wabash had about as much chance of paying a 
dividend as Comstock Tunnel has today. Mr. 
Dayton owned a drug store and never read a 
financial magazine. 

One day the Wabash R. R. drifted into the 
hands of a receiver and the registered stock- 
holders were so notified. Mr. D. was not a reg- 
istered stockholder and he did not hear of the 
trouble. All registered holders, or those holding 
endorsed certificates, were permitted to pay an 
assessment and get into the new company up to 
a certain date. After that date the old stock 
became worthless paper. 

Mr. D. now holds worthless paper. Incident- 
ally, there are a few who did not pay the assess- 
ment when Northern Pacific reorganized years 
ago. They also hold worthless paper. Mr. D. 
now knows that it is better to be on the books 



134 WHAT EVERY INVESTOR 

of the company as a holder of stock and he will 
get all the announcements sent out in the fu- 
ture. 

Case 8. Keeping Track of Dividends 

A prominent editor of a nationally known pe- 
riodical, whose business acumen is recognized — 
or was recognized — by his friends had a specula- 
tive account with a brokerage firm. He held vari- 
ous issues of securities and accepted the state- 
ment from his broker each month, just as he 
might glance over the headlines of his newspa- 
per while going home in the subway. 

Among the securities was American Chicle, 
which paid a dividend. This fact was over- 
looked by the broker's clerks and nary a credit 
did Mr. Editor get for these dividends, but he did 
not suffer ; for he never knew. Had he followed 
the announcements he would have noted the ab- 
sence of this item at once and held his broker for 
it. Of course the broker was responsible for the 
collection in this case. 

Case 9. A Forgery Case 

A clerk in a New York Trust Co. gained ac- 
cess to the blank certificates of a prominent 



OUGHT TO KNOW 135 

corporation whose stock is listed on the New 
York Stock Exchange. He filled these blanks 
out to John Jones, endorsed Jones' name and 
forged the signatures of the transfer agent and 
registrar. He took the certificates to Philadel- 
phia and borrowed 80 per cent, of their value, 
about $25,000, and left for South America. 

During the course of business one of these 
certificates fell into the hands of a bona fide in- 
vestor, Mr. Gerald Nelson, who sent the certifi- 
cate to the company to be transferred to his 
name. The records showed that there was no 
John Jones and that more than the authorized 
capital of the company had been issued. 

The forgery came to light and Mr. Nelson was 
able to recover back to the original lender. Had 
he not transferred the stock at once, the compli- 
cations would have been serious. Has any reader 
a forged certificate not as yet transferred to his 
name ? * 

Case io. He Lost His Stock 

A Buffalo, N. Y., investor bought 100 May 
Department Stores and paid for it. He carried 
it in his pocket preparatory to placing it in his 



136 WHAT EVERY INVESTOR 

safe deposit box, but did not transfer it to his 
name. He did one sensible thing : he jotted down 
the number of the certificate in his memorandum 
book. While walking along the street, he acci- 
dentally jerked it from his pocket and did not 
at once notice the loss. The discovery was made 
at the vault. 

Under ordinary circumstances the replacing of 
this certificate is serious and sufficient trouble 
even if registered in his own name, but the situa- 
tion became complicated. He learned the name 
of the registered holder who lived in Cincinnati. 
It was necessary to get a full release from this 
man to himself of that particular certificate and 
the legal red tape is Gordian Knot-like. 

Suppose the registered owner had left for parts 
unknown or had died ? Will any rightminded in- 
vestor take a chance like this? 

Case ii. Texas Co. Rights 

A Chicago customer of a large brokerage firm 
owned 100 shares of Texas Co. stock. Nearly 
every year this company increased its capital and 
the holder of the stock received a certificate 
showing that he had the right to subscribe for 



OUGHT TO KNOW 137 

new stock. Sometimes the sale value of such 
rights amounted to 30 dollars per share. 

This customer slept peacefully and never knew 
he could claim these rights until market condi- 
tions had lowered the price of the stock and 
consequently the value of the rights. This ex- 
ample happens daily to many hundreds of in- 
vestors who fail to transfer their stock. 

Case 12. A Letter from a Cashier 

"Last Monday a customer called us on the 
'phone asking why he did not receive a dividend 
on an odd lot of stock bought around the latter 
part of September, which sold ex-dividend the 
first part of October. The dividend was paid 
about the last of that month. Upon our asking 
him to look at the certificate and let us know 
in whose name it was, he reported the name of 
a firm well known in the brokerage business. 
He had assumed that because he bought the 
stock that it would be in his own name. (And 
this man called himself an investor!) 

"Our second case was an individual who had 
purchased a non-dividend paying stock years 
ago which stood in the name of a firm which 



138 WHAT EVERY INVESTOR 

had liquidated its affairs and closed up over a 
year ago. This man was pressed for funds but 
the stock was not a 'good delivery/ not acceptable 
to the buyer under the circumstances, and the 
man was compelled to go without his money until 
all legal complications were cleared away. His 
suffering and inconvenience might have been in- 
tensified, had the transfer office been in Arizona 
or had he been unknown to the firm through 
which he sold the stock.'' 

In Conclusion 

While the names used are fictitious yet the 
principles set forth are only too true and will 
happen time and time again unless the investor 
observes the fundamental rules of self protec- 
tion. The investor who pays for his stock and 
who does not transfer it to his own name is no 
better than the householder who goes to At- 
lantic City for the week-end forgetting to close 
or lock the front and back doors or the windows 
of his home, where the silver and valuables are 
tempting bait for the first unscrupulous citizen 
whose eyes turn that way. 



OUGHT TO KNOW 139 



CHAPTER XI 



Gossip and Its Value 

How Much Value Newspaper Items and 
Brokers' Gossip Has — A Formula for Ask- 
ing Questions 

A SUCCESSFUL business man, once upon 
a time, found it necessary to consult a fa- 
mous lawyer. The case was one which 
involved technical terms and hinged on judicial 
decisions of an intricate nature. The lawyer 
questioned his client, cross-examined him and 
recross-examined him. He then formed a two 
thousand word hypothetical question and gave 
the answer. The client allowed his mind to 
wander during the discourse because he could 
not follow the peculiar and specialized language 
of the legal profession. After the lawyer had 
used about $200 worth of legal time, he reached 
a conclusion. The client realized that the legal 
train had reached a station but he did not know 



140 WHAT EVERY INVESTOR 

the name of the station, so he asked, "Have I 
any chance of winning this case?" 

The investor — the average investor — is not one 
whit different from the above mentioned business 
man. All he wants to know is whether his pros- 
pective investment is the right one for him to 
make, or the wrong one for a man of his cir- 
cumstances. The language of finance is just as 
confusing as the language of law. Many of the 
books which are written by experts in finance 
are thoroughly impossible to the average inves- 
tor. 

"Newspaper Dope" 

It is remarkable how many people always be- 
lieve what they read in the newspapers. All 
news is made presentable and in giving it this 
dressing the salient point is often lost or mini- 
mized. Sometimes a paragraph or a column in 
the newspaper could easily be boiled down to 
five lines. Many reporters are paid space rates. 

Financial news as printed in the very best 
general newspapers is treated in the same man- 
ner as the story of John Smith's wife running 
off with John's chauffeur. The writer recently 



OUGHT TO KNOW 141 

went through a file of clippings covering the 
past two years of Curtiss Aeroplane Company's 
history. Rumors were stated as facts. State- 
ments of officials were printed without being 
checked. One article reported millions of Gov- 
ernment orders and another reported none. If 
you, Mr. Average Investor, had invested your 
funds on this news — as many do — you would 
have either made a million dollars or gone 
broke. In either case you could have reached 
the same result by going at it blindly. 

Most financial writers hedge in their fore- 
casts. After you have read the article, you deter- 
mine that Brown in the Express thinks the 
market is going up. It goes down. You write 
Brown a letter of criticism and make fun of 
his judgment. Brown shows you where he said 
"something" in that very article which you over- 
looked which meant that the market was more 
likely to go down. Then you feel that you have 
made yourself ridiculous, but it does not pre- 
vent you from believing Smith in the Owl. 

Before you make any investments based on 
financial news as appearing in the daily papers, 
get a back file and chart out the predictions 



142 WHAT EVERY INVESTOR 

and statements. Then see how they fit in with 
what actually happened. 

Do not base your investments purely on news- 
paper predictions or suggestions. Check them 
up with the formulae which close this article. 

Stock-Brokers' Suggestions 

The man who represents his firm on the Stock 
Exchange is deemed by the layman to have "in- 
side" information which is very valuable. There 
may be some brokers, whose daily business it is 
to execute orders, who also have a good knowl- 
edge of investments. Certain clients have been 
hunting for many of these "investment, special- 
ists" for years and have metaphorical double- 
barreled shot guns to use when they meet 
them. Just stop and think, Mr. Average Inves- 
tor, and ask yourself how these brokers who are 
buying and selling all day long can have time 
to study real investment conditions. The mem- 
ber-brokers have too close a perspective. They 
are like men standing close to a wall. They 
can only see a few square inches of it and not 
the whole wall. 



OUGHT TO KNOW 143 

The stock broker is not usually the best man 
to ask about investments. His speculative acu- 
men may be above par, but there is a wide dif- 
ference between investment and speculative 
knowledge. There are some stock brokers who 
make a specialty of investment conditions and 
others who hire men for no other purpose than 
to hunt out good investments. They are part 
of the formulae which will be presented to you. 

Corporate Reports 

In the goodness of your heart, Mr. Average 
Investor, you purchased five shares of Southern 
Pacific, gave it to your wife and had the stock 
transferred to her name. One day, while you 
are at business, the postman brings a 200-page 
yearly report to your wife. It contains a spe- 
cial message from the president to stockholders, 
another from the treasurer, a certified statement 
from the accountants, and 20 or 30 exhibits, 
ending up with a wonderful map of the United 
States with the Southern Pacific road superim- 
posed in red lines. 

You watch your wife with much interest. She 



144 WHAT EVERY INVESTOR 

glances through the costly report and reaches the 
map. She notes Oshkosh, where her sister lives, 
turns the book over and quietly drops it in the 
library waste basket. Later, after she has re- 
tired, you fish it out and note that the president 
says everything is running well and that it is 
costing the company much money for taxes. But 
the report does not mean much to you unless 
you have learned to separate the chaff from the 
w T heat. The fact that your road earned $13 a 
share during the year means little unless you have 
the comparison of former years, the comparison 
with other trunk lines in the same territory, the 
condition of surplus, the item of depreciation, the 
condition of the rolling stock, etc. 

You have been a very busy man accumulating 
money to invest, but you have not had the time 
or inclination to become a specialist in reading 
a railroad report. The same situation applies to 
your industrial, mining and public utility stocks. 
Your bond investments demand a separate train- 
ing. It is clear that to protect yourself you 
should at least know how to ask questions and 
learn who are the proper authorities to answer 
them. 



OUGHT TO KNOW 145 

Subway and Office Gossip 

The writer knew of one man who bought 100 
shares of U. S. Steel preferred a^ an investment. 
He was sitting in his broker's office when he re- 
ceived the report. Another customer, of a specu- 
lative type, made a remark which he overheard. 
He did not know the man and the remark was 
made to a third customer likewise unknown to 
the involuntary eavesdropper. The remark was : 
"I believe the Steel stocks are going to the dogs." 

Our investor felt that he had made a mistake. 
He wanted to sell his recent purchase right 
away and had to use considerable will power to 
hold faith in his judgment. 

How many of you, Average Investors, have 
been influenced by remarks overheard in the 
subway, street cars, trains and other public 
places? Probably hundreds of thousands of 
shares and millions in bonds have been purchased 
and sold as the consequence of involuntary eaves- 
dropping in public places. It is a true bill against 
the uneducated condition of the average inves- 
tor. The chances are nine hundred and ninety- 
nine in one thousand that the speaker knows no 
more about an investment than you know about 



146 WHAT EVERY INVESTOR 

the lumber business, and yet you permit yourself 
to be influenced by a man who is probably more 
ignorant than yourself. 



The Lure of the Pamphlet 

"Diamond Jim" Brady was one of the greatest 
salesmen which this country ever produced. As 
an efficient business man he possessed a world- 
wide reputation. His associates were railroad 
presidents and men high in finance. Yet his es- 
tate was chock full of worthless shares. Wheth- 
er these were purchased to please casual friends 
or because of the representations of literary ( ?) 
prospectuses no one will ever know. There is 
no difference in the psychology or the material 
result. A friend who has u a good thing" and a 
glowing prospectus are twin brothers. 

This does not mean that every efficient and 
alluring prospectus is untrue and does not rep- 
resent a good investment. But the average in- 
vestor must not base his judgment on the evi- 
dence submitted by the plaintiff. Credible wit- 
nesses are just as important to an investment as 
they are to substantiate evidence in law. Where 
will you find these witnesses? 



OUGHT TO KNOW 147 

The Formula for Mr. Average Investor 

(1) He must know what questions to ask. 

a. Is this the right investment for me and 

my capital? 

b. Have I followed "John K. King's" for- 

mula? 

c. Have I verified the newspaper reports ? 

d. Have I asked the right questions about 

the report? 

1. What are the questions to ask about 

railroads ? 

2. What are the questions to ask about 

industrials ? 

3. What are the questions to ask about 

oils? 

4. What are the questions to ask about 

mining stocks? 

5. What are the questions to ask about 

bonds ? 

6. What are the questions to ask about 

public utilities? 

7. What are the questions to ask about 

this investment? 

e. Have I given "Dame Rumor" too much 

credence ? 



148 WHAT EVERY INVESTOR 

f. Have I checked up the statements of the 
prospectus ? 
(2) He must know where to get his informa- 
tion. 

a. What does my investment broker think? 

1. Has he any interest in the security? 

2. Is he antagonistic for personal rea- 

sons ? 

b. What does my banker think of its worth? 

1. Is his conservatism too pronounced? 

2. Is his ability any better than mine to 

analyze ? 

c. What is the judgment of my financial 

publication ? 

1. Have they any personal interest in 

the security ? 

2. Have they given me a definite opin- 

ion? 

3. Have they ferreted out the essential 

facts ? 

4. Are they equipped with trained ex- 

perts, accurate statistics and sea- 
soned judgment? 

I firmly believe that, everything considered, the 
Analytical Bureaus of -unprejudiced financial 
publications are the best source of information 



OUGHT TO KNOW 149 

on which to base your decisions. It is their 
business, and like the competent lawyer they 
have the data and information on which their 
opinions are based. You must, however, have 
some basis of knowledge on which to ask the 
proper questions and understand the answers 
when you get them. 



150 WHAT EVERY INVESTOR 



CHAPTER XII 

One Hundred Books to Read 

A Classification of the Best Books for Study 
By the Investor 

IN all the preceding articles of this series, the 
author has bared the fundamental features 
which every investor should have in mind be- 
fore making an investment. The field is so vast 
that it is not possible to go into detail for each 
subject. But the reader has no doubt felt a 
desire to go deeper into one or more phases, and 
it is for this purpose that the One Hundred 
Books are listed and grouped for him in this ar- 
ticle. 

The Groups 

The elementary books cover the subject as a 
whole in Group I. They place before the student 
the geography and the machinery of the subject. 

Group II deals with the definitions of invest- 
ments, shows which are good and which are bad. 



OUGHT TO KNOW 151 

It takes into consideration the different reasons 
why investments are made, such as for income, 
for profit, etc. 

Group III contains the only fundamental books 
known on the subject of speculation. Almost all 
other speculative books deal in generalities and 
are not the result of actual study and experience, 
nor do other books express themselves in as 
definite a manner with so many concrete ex- 
amples. 

Intermediate Studies 

The books in this group cover the entire sub- 
ject of finance. They can be understood and 
appreciated by all readers who have thoroughly 
understood the books in the preceding groups. 
Their purpose is to go deeper into the structure 
of corporate history and to take up the more 
intricate forms of investment and speculative 
machinery. 

The Various Branches 

Group V takes into consideration a study of 
the various forms of corporate enterprise and 



152 WHAT EVERY INVESTOR 

also the principal commodities. Collateral 
branches of investment such as land mortgages, 
farm loans and insurance are not taken up in 
detail but are covered in an elementary form 
in other books, such as Book 4 in Group II. 
These books are self-explanatory to the student 
from the very nature of the subjects, but they 
will not be fully understood nor their applica- 
tion in a practical way established unless they 
are studied after a course in the former groups. 

The Post Graduate Course 

The books listed in Group VI are not ones 
which the novice will understand or appreciate. 
They state much of the theory of finance which 
is only applicable after the student has a basic 
knowledge of the subject. Book 6, for example, 
would not be intelligible to the novice nor could 
he use the information until he was able to com- 
prehend the relationship of banking with con- 
ditions affecting the price of securities. 

Do not for one moment think that these hun- 
dred books can be read and digested in one year 
or two years. Nor does the author suggest 
that the knowledge gained from this reading may 



\ OUGHT TO KNOW 153 

be utilized to personal practical advantage with- 
out the actual experience of doing the things 
which are discussed. 

If you, reader, have been speculating in min- 
ing stocks, you will desire to read the books of 
Group I, Group III, Books 2, 3, 6, 8, 11, 14 and 
16 of Group IV and have on hand all the books 
of Group V under the head of Mines and Oils. 
If you desire to trade in wheat, you will choose 
from the titles the books which you know will 
be of practical use to you from the groups. 

While it is a well known fact that most people 
desire the name of investor and taboo the name 
of Speculator, yet neither Investor nor Specula- 
tor should omit a study of either one of the sub- 
jects. Group II is very much inter-related with 
Group III and the fundamental features dovetail. 

Magazine and Papers 

The student of finance must of necessity keep 
up to the times. He must read his morning 
and evening papers especially for the statistics 
and the general news. Note Book 5 of Group I. 
It is also well for him to subscribe for some peri- 
odical which will help to arrange his statistics in 
understandable form. There are a number of 



154 WHAT EVERY INVESTOR 

New York newspapers which issue yearly finan- 
cial reviews containing these essential statistics 
and the bound volumes of The Magazine of 
Wall Street contain railroad, industrial, and 
banking statistics for years back. 

Each trade has its publication — many of the 
trades have two or more publications devoted ex- 
clusively to the one business. 

Other publications which will be of assistance 
to the advanced student are the London Econo- 
mist, New York Journal of Commerce, Wall 
Street Journal, The Commercial and Financial 
Chronicle and The Bankers Magazine. The re- 
ports of the United States Interstate Commerce 
Commission, United States Treasury Department 
reports and the reports of Gas and Electric Light 
Commissioners of the various states may be ob- 
tained without much trouble and at a small cost, 
or may be found on file at the principal libraries. 
But there is no other non-technical magazine cov- 
ering the elementary ground of all branches 
except The Magazine of Wall Street. 

A Short Course from the Elementary 
For those who are desirous of reading only a 
few books on the subject, the following list has 



OUGHT TO KNOW 155 

been suggested to the author by one of the best 
students of finance, comprising investment and 
peculation, who writes much for the public : 
'^In tro du c to ry : 

Money and Investments. — Rollins. 

The Machinery of Wall Street. — Selden. 

How to Read the Financial Page. — Browne. 

You and Your Broker. — -Smitley. 

Investment: 

The Careful Investor. — Meade. 

Investing for Profit. — Selden. 

The Working of the Railroads. — McPherson. 

Investors' Pocket Manual. 
Speculation: 

The Business of Trading in Stocks. — "B." 

Psychology of the Stock Market. — Selden. 

Studies in Tape Reading. — "Rollo Tape." 

Fourteen Methods of Operating in the Stock 
Market. 
Banking, Finance, Economics: 

Principles of Money and Banking. — Conant. 

Principles of Bond Investment. — Chamberlain. 

Principles of Economics. — Seligman. 

Financial Crisis. — Burton. 

Financial Statements Made Plain. — Saliers. 



156 



WHAT EVERY INVESTOR 




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OUGHT TO KNOW 159 



CHAPTER XIII 

Liberty Bonds 
Points of Interest to Holders 

SECURITY— The credit of the United States 
Government, of which all these bonds are a 
direct obligation. 

Any investor receiving a prospectus with the 
above description need go no further in his in- 
vestigation as to the advisability of purchasing 
any class of Liberty Bonds. Even if the patri- 
otic motive for investing were eliminated — which 
is an almost impossible conception — the invest- 
ment would stand as the most secure which has 
ever been presented. 

It is perfectly evident that some day Liberty 
Bonds may sell for 105, 110 or possibly 115. To 
prevent this appreciation in value our country 
would have to be conquered by an enemy. An 
impossible situation! 



160 WHAT EVERY INVESTOR 

What Is a Liberty Bond? 

A Liberty Bond is an evidence of an obliga- 
tion of our Government to pay back at a speci- 
fied time money which is loaned to the Govern- 
ment by you. The Government agrees to pay 
interest to the lender every six months at a spec- 
ified rate and to return the entire principal at a 
given time. The lender not only is credited with 
patriotic motives, but makes the most conserva- 
tive investment ever known. 

What Kinds of Bonds Now Exist? 

1. The first loan offered the lender 3j^ per 
cent., and the face value of the bonds is due 
June IS, 1947. These; bonds are exempt from 
all taxation except the inheritance tax, which is 
collected from the owner's estate. They may be 
exchanged for other bonds bearing the same or 
a higher rate of interest of any future issue 
which may be sold during the war. 

These bonds have the best conditions for the 
wealthy man who pays a large tax and they have 
the best conversion privilege, for they may be 
converted into any future issue. The interest is 



OUGHT TO KNOW 161 

payable on June 15 and December IS of each 
year. 

There are both registered and coupon forms, 
but it is not advisable for the small holder to 
register these bonds ; for, though greater pro- 
tection is gained against loss, this factor is offset 
by the red tape and intricate detail — also delay — 
in releasing them for sale or future conversion. 
Special government forms are necessary, the 
affidavits of National Bank officers, and other in- 
convenient guarantees. If desired, the face value 
can be paid in 1932, a matter which is at the 
option of our Government. 

2. The second loan was issued by the Govern- 
ment at 4 per cent. These bonds were issued in 
November, 1917, and the Government promises 
to pay the face value in 1942, with the option 
of paying them in 1927, if so desired by the 
Government. The interest is paid every six 
months on May 15 and November 15, at 4 per 
cent., or 2 per cent, each period. 

These bonds are exempt from all taxes also, 
except the inheritance tax, as in the case of the 
first issue, and except the income surtaxes, ex- 
cess profits and war profits tax. Any individual 
owning $5,000 or less of these bonds can exempt 



162 WHAT EVERY INVESTOR 

the income from this amount from the surtax. 
But all those who pay a surtax on their incomes 
will have to include income from these bonds 
over that accruing from $5,000 or more. 

For the very rich man and wealthy corpora- 
tions these bonds are not as profitable for hold- 
ings because the tax paid on the income would 
more than offset the J^ per cent, difference in 
interest rate. These bonds can be exchanged for 
later issues bearing the same rate of interest, or 
if the very next issue is at a higher rate an ex- 
change may be made. They cannot be exchanged 
for the second or third issue after this bearing a 
higher rate. 

3. The converted 4 per cent, bonds are those 
which are the result of lenders changing the first 
issue of 3^'s into the next loan. These con- 
verted 4 per cent's are due to be paid off in 
1947, with the option on the part of the Gov- 
ernment of paying them in 1932. The exemp- 
tion privileges are exactly the same as the Sec- 
ond 4 per cent's and the possibility of exchange 
into later issues is the same as the Second 4 
per cent.'s. The man who exchanged his 3^'s 
for 4 per cent.'s can exchange for the next issue 
if he thinks it advisable, but the man who re- 



OUGHT TO KNOW 163 

tained his original Z]/ 2 per cent's can wait and 
exchange for any future issue. The interest on 
these bonds is due June 15 and December 15, the 
same dates as the 3^2 per cent, bonds. 

4. The third loan was issued by the Govern- 
ment at 4^4 per cent. These bonds were issued 
during the first days of May, 1918, and the Gov- 
ernment promises to pay the face value on Sept. 
15, 1928. They cannot be redeemed before this 
date except for purchase for the account of the 
Sinking Fund. The interest is paid every six 
months on March 15 and Sept. 15 at 4*4 per 
cent, or 2% per cent, each period. 

Bonds of this issue are not convertible into any 
future loan nor are any 4j4 per cent, bonds ac- 
cruing from the conversion of any previous issue 
again convertible into future issues. 

The man who did not convert his original 3J^ 
per cent, bonds into the 4 per cent/s of the sec- 
ond issue has the privilege of converting them 
into the 4% per cent, bonds of the third issue up 
until Nov. 9, 1918, but not thereafter. When he 
gets the new 4J4 per cent, through such conver- 
sion the date on which the Government will pay 
him the face value of his bonds is the same date 



164 WHAT EVERY INVESTOR 

as that on which the 3^2 per cent, bonds will be 
paid and not 1928. 

Those who converted the 3J^ per cent, bonds 
into 4 per cent, bonds of the second loan also 
have the privilege of again converting these 
"First Conversion 4 per cent's" into the 4%. 
kind up until Nov. 9, 1918. These bonds will of 
course have the same date for the payment of 
principal as the original 3J^ per cent's (1932- 
1947). 

The man who purchased the original bonds of 
the second issue, or the 4 per cent, due 1927- 
1942, has the privilege of converting them into 
these new 4J4 per cent, bonds until Nov. 9, 1918, 
but the date for payment of principal will be the 
same as before (1927-42). 

The tax provisions of this 4^4 per cent, issue 
are just about the same as described above and 
relating to the second loan. 

How Should They Be Kept? 

The matter of registration of all three classes 
of bonds will of course protect the holder against 
loss, but this element of protection would not 
seem to be of such importance as the problem of 



OUGHT TO KNOW 165 

releasing them for sale, borrowing purposes or 
conversion. It is therefore advisable for the 
small investor to keep his bonds in coupon — 
easy-to-dispose-of — form. 

These coupon bonds are not much different 
from gold coin or bills. If they are lost there 
seems little likelihood of recovery even if the 
numbers are known, for these bonds are the most 
negotiable form of bond known. If the bonds 
are lost in coupon form you cannot get new ones. 
The best that can be done is to notify the Treas- 
ury Department in Washington and your Cen- 
tral Federal Reserve Bank to try to look out for 
them. 

Bonds which have become mutilated may be 
replaced by the United States Treasury when 
proper affidavits are made to the Treasury offi- 
cials and a bond of indemnity is given by the 
owner. The sum and substance of the matter 
is that the owner has just about as much chance 
of recovering lost Coupon Liberty Bonds as 
he has to recover a twenty-dollar bill. 

Not every investor in these bonds feels that 
he can afford a safe deposit vault. If this is 
true, it is best to apply to the bank or trust com- 



i66 WHAT EVERY INVESTOR 

pany in your city or town and ask them to -help 
you out of your troubles. 

If you can afford a safe deposit box — cost 
from $2.50 per year upwards — by all means rent 
one and put your bond in it and whatever other 
valuables it may hold which you have been hid- 
ing in bureau drawers or tucked away in mat- 
tresses. Do not carry these bonds on your per- 
son or leave them in your home, for there are 
very few burglar or fire insurance policies which 
will cover the loss of your Liberty Bonds. 

How Can You Collect the Interest? 

If your bonds are registered, you will receive 
a check from the United States Government on 
your interest day. You must be sure that the 
United States Treasury Department has your 
proper name and address. If you have coupon 
bonds, cut off the coupon which corresponds with 
the interest date due — be very careful to cut off 
only the coupon due — and present it to any bank, 
trust company or postoffice which has a money 
order department. Your broker also will cash 
the coupon for you. 

Those who own 3j4 per cent, bonds do not 



OUGHT TO KNOW 167 

need any form of ownership certificate — re in- 
come tax — to get their interest. Those who own 
more than $5,000 face value of the Second 4 
per cent., the Converted 4 per cent., the Third 
4^4 per cent., or any of the converted A%. per 
cent.'s will be compelled to furnish an ownership 
certificate before collecting their interest. 

This article cannot enter into the various kinds 
of forms to meet certain conditions, but the ad- 
vice is to go to your bank, trust company, broker 
or postmaster and get the proper information 
from him. Many stores and mercantile firms will 
accept your coupons the same as cash, if no in- 
come tax ownership certificate blank is neces- 
sary. If you lose a coupon your chance of re- 
placing it is about one in a million, so be very 
careful not to let it get away from you, but cash 
it as soon as possible after cutting it from your 
bond. 

Many bonds have but a few years' supply of 
coupons on them. When the set on your bond 
comes to an end, take the bond to your bank or 
broker, who will send it to the proper place to 
have additional coupons put on. Do not try to 
do this yourself. Always take a receipt for your 



1 68 WHAT EVERY INVESTOR 

bond when left with your bank, broker or post- 
office. 

How Can You Buy and Sell Bonds? 

The principal market for Liberty Bonds is in 
New York City on the New York Stock Ex- 
change. But this market is mainly for denomi- 
nations of $1,000 and up. There are a number 
of firms who make a specialty of the smaller or 
"baby" bonds, and your bank or trust company 
will be glad to have your order carried out. A 
National Bank is really a Government institution 
and should you meet with a rebuff or a refusal, 
find out the name of the nearest Central Federal 
Reserve Bank and communicate direct with them. 
Beware of brokerage firms and stock brokerage 
firms about which you know little or nothing. 
If you are located in a large city, you can find 
out which are responsible and which are not, 
but those bond holders residing in smaller towns 
or in the country who have not had dealings 
with brokers should "play safe" and go to their 
banks or postmaster for advice. 

It may be that the buyer of a $50 or $100 
Liberty Bond will have to pay just a trifle more 



OUGHT TO KNOW 169 

in the open market than he would for the $500 
or $1,000 bond. He may also get a trifle less 
on sale, but the difference is so small as to be 
hardly noticed. The variation between bid and 
offer of these bonds can be as close as two cents 
for every $100 face value of bond. 

If you sell your bond between interest dates, 
you will receive the accrued interest from the 
"last date of payment, but the next coupon will 
go with the bond. The buyer pays you the pro- 
portion of interest you are entitled to up to the 
date you sold him your bond. In like manner, 
if you buy a bond, you must pay the seller his 
accrued interest up to the date of purchase. 

You will find quotations for all Liberty Bonds 
in the city papers, or your bank will tell you the 
market price. There is no reason why you 
should sell at any less figure, and beware of those 
who desire to buy your bonds at less than the 
quoted price. 

If you cannot pay for your bonds in full at 
the time the Government requires the money, or 
if you wish to save money by purchasing these 
bonds on the installment or partial payment plan, 
you will find reputable firms which make a busi- 
ness of this form of purchase. Many local 



170 WHAT EVERY INVESTOR 

banks will be glad also to arrange terms for your 
convenience, but these reputable brokerage and 
investment firms have special plans for the small 
investor which will be communicated to him upon 
his inquiry. 

How Can You Borrow on Your Bonds? 

If you find yourself in dire need of funds, 
it is not necessary to sell your bonds. You can 
borrow on them until such a time as your finan- 
cial condition is improved. Any bank will help 
you, and many firms make it a business of loan- 
ing money on these bonds. Do not borrow un- 
less the lender gives you at least 90 per cent, of 
the market value of your bond. If your bond is 
valued at 97 and the face value is $100, you 
should get about $87.50 as a loan. Under no 
conditions should you be charged more than 6 
per cent, for the amount borrowed, and the in- 
terest from the bond put up as collateral belongs 
to you when it is due. 

You can borrow with an understanding that 
you will pay the entire amount borrowed at a 
certain time or you can borrow with the under- 
standing that you will pay the loan in install- 



OUGHT TO KNOW 171 

ments. In the latter case you must be certain 
that you are given credit for the installments 
paid in and no interest is charged on these in- 
stallments. 

It is necessary for you to make certain that 
you get a receipt, or form of agreement, for 
the loan made, so that there will be no dispute 
in the future. This agreement or receipt should 
be cared for just the same as if it were the 
actual bond. 

In Recapitulation 

At the time this book goes to press there are 
the following kinds of Liberty Bonds in exist- 
ence : 

1. 15-30 Year First Liberty Loan 3j4% Payable 
1932-1947. 

2. 15-30 Year Converted 4% Payable 1932-1947. 

3. 15-30 Year Re-Converted A]/ A % Payable 1932-1947. 

4. 10-25 Year Second Liberty Loan 4% Payable 1927- 
1942. 

5. 10-25 Year Converted A%% Payable 1927-1942. 

6. 10 Year Third Liberty Loan A]/ A % Payable 1928. 

Number 1 may be converted into any future 
loan running 5 years or more and bearing a 
higher rate of interest. 



172 WHAT EVERY INVESTOR 

Number 2 may be converted into the 4% which 
ends the privilege. 

Number 3 has no further conversion priv- 
ilege. 

Number 4 may be converted into the 4*4 per 
cent, which ends the privilege. 

Numbers 5 and 6 have no further conversion 
privilege. 

It is very important to remember that when 
any bond is converted into another issue it con- 
tinues to bear the same interest dates and date 
for redemption which it originally had. Con- 
version, however, changes the interest rate, tax- 
ation feature and conversion privilege into those 
of the bonds into which they were converted. 

In Conclusion 

If there are any questions which this article 
does not cover and about which you desire infor- 
mation, your local bank officials will be glad to 
answer them for you. 

It is your duty, patriotic and personal, to know 
everything there is to know about your bond. 
Read what is printed on the body of the bond; 
read what is on the coupon; understand every 



OUGHT TO KNOW 173 

feature and item connected with it. This lesson 
is the first step in your education as an investor. 
The people of our country have been poor in- 
vestors. The poorest citizen of France has known 
all about his Government bonds for hundreds of 
years. Our past and future Liberty Loans will 
awaken an investment interest which has come 
to stay. You must keep your education up to 
and above the average of the times and do not 
be afraid to ask about what you do not know 
or what is not clear to you. 



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